B e f o r e :
HIS HONOUR JUDGE SIMON BARKER QC
sitting as a Judge of the High Court
||IN THE MATTER OF THE INSOLVENCY ACT 1986
||AND IN THE MATTER OF MAMA MILLA LIMITED (IN CREDITORS VOLUNTARY LIQUIDATION)
||(1) TOP BRANDS LIMITED
||(2) LEMIONE SERVICES LIMITED
||- and -
||(1) GAGEN DULARI SHARMA (as former Liquidator of Mama Milla Limited)
||BARRY JOHN WARD (as Liquidator of Mama Milla Limited)
Mr James Morgan instructed by KW Law LLP for the Applicants
Mr William Hansen instructed by ZAK Solicitors until 4 July 2014 and by Saints Solicitors as from 4 July 2014 for the Respondent
Mr Barry Ward in person
Hearing dates 3 - 5 June, 7 July 2014 and 4 August 2014
HTML VERSION OF JUDGMENT (2)
Crown Copyright ©
HHJ SIMON BARKER QC :
- By an application issued on 28.10.13 pursuant to s.212 of the Insolvency Act 1986 (respectively "s.212" and "IA 1986") Top Brands Limited ("TBL") and Lemione Services Limited ("LSL") as the applicants (collectively "As") seek an order that Mrs Gagen Sharma ("GS") repay, restore, account or pay compensation to Mama Milla Limited (in liquidation) ("MML") for the sum of £548,074.56 ("the Sum") or such other sum as the court thinks just, and other relief.
- For the purposes of this judgment, each of TBL and LSL are to be taken to be creditors of MML and, therefore, to have standing under s.212(3) to seek an order that GS repay, restore, account or pay compensation in the Sum to MML. As' status as creditors is derived from a consent order in earlier proceedings between As and GS (Case No. 8264 of 2012). Very shortly before the date set for the trial in these proceedings GS sought permission to challenge As' standing as creditors in a fresh action which GS wished to run parallel with these proceedings on the grounds that TBL's and LSL's claims to be creditors of MML and their proofs of debt are fraudulent and that GS' consent to the order in the earlier proceedings was procured by As' fraudulent misrepresentation. To accommodate the parallel proceedings, GS also sought an adjournment of the trial. GS's application was refused, ultimately by the Court of Appeal on 23.5.14 (see  EWCA Civ 761).
- The allegation against GS is that the Sum was money belonging to MML and that, while acting as liquidator of MML, GS negligently and/or in breach of fiduciary duties misapplied the Sum when paying it out by making or authorising 18 transfers of money between 30.11.11 and 30.4.12. Put shortly, GS's defence is that, at the time, she believed (1) based on legal advice from an experienced insolvency lawyer at Gateley LLP (respectively "KT" and "Gateley"), that the Sum was subject to a Quistclose trust in favour of a customer of MML, SERT-MST PLC ("SERT"), and (2) that the transferees were nominees of SERT. GS maintains that, at the time, it was reasonable for her so to believe.
- GS is no longer the liquidator of MML. In these proceedings As also applied, under s.108(2) IA 1986, for an order that GS be removed from office and be replaced by Mr Barry John Ward ("BW"). On 20.12.13, the court directed that there be a meeting of creditors to decide this question and, at a meeting held on 17.1.14, GS was removed from office and replaced by BW.
- BW was joined as a party on 3.6.14, the first day of the trial. This was foreshadowed during a telephone hearing on 16.5.14 in which BW did not participate. On 23.5.14, As issued an application for an order that, without prejudice to such rights as BW may have as regards challenging the status of As as creditors of MML, BW (as liquidator of MML) be joined to this application so that he is bound by the judgment at trial and may enforce any order made. BW attended at the trial in June and, on the basis proposed by the court that he would not be required to participate in the trial other than as a witness if required to give oral evidence, did not oppose being joined. After being joined as a defendant, BW agreed that, should an order for restoration or repayment be made against GS, he would not oppose an order that any recovery should not be paid out to As, or either of them, without further order of the court.
- When being joined to these proceedings, BW also made clear that he would not object to being bound by the outcome of As' application provided he would remain free to make a separate s.212 application against GS on other grounds, should his investigations as liquidator reveal such. Mr Hansen, GS's counsel, submits that the joinder of BW should have the effect of precluding him from issuing any s.212 application as liquidator of MML against GS because GS should not face such litigation more than once and because the court raised the question of joinder on 16.5.14 expressly with a view to affording GS protection from the risk of repetitious litigation. It is correct that I raised the prospect of BW being joined with GS's position in mind, but it is also the case that when joinder of BW was considered, BW had been in office for less than 6 months and had made clear in reports circulated to the parties and filed at court that his investigations into MML and its liquidation were still ongoing. That being so, it would be an unjust interference with the exercise by BW of his duties and powers as liquidator of MML to prohibit him from making an application under s.212 based on material – if there be such – not before the court on As' application. Thus, the joinder operates only to bar BW from attempting, in separate proceedings, to make the same claims or or raise the same issues as are for determination by this judgment.
- BW has also made clear that his investigations include MML's trading with TBL and LSL (from whom MML is said to have purchased substantial consignments of toiletries, in particular soap and razors) and with SERT (to whom MML is said to have sold such consignments). The reason for this is that the real business conducted through MML was VAT fraud. It is apparent from BW's 1st interim report that within two months of his appointment BW had discovered that MML had been used to defraud HMRC of more than £780,000 of VAT by simply not accounting for VAT on outputs and by making no or false VAT returns. Of course, MML being a fictional person, the dishonest intent was that of those in control of MML. At trial, BW's oral evidence was that the value of the VAT lost to HMRC by fraud was not less than £1.5million. The facts that BW describes in his 1st report point clearly to what is termed acquisition fraud (straightforward under accounting for VAT to HMRC by MML). BW is, or was at the date of the trial, still investigating whether the fraud is a more sophisticated missing trader or carousel fraud involving any or all of TBL, LSL and SERT.
- In the judgment by which I dismissed GS's application to be permitted to challenge As' standing as creditors, I considered whether or not it is realistically arguable on the available material that any or all of TBL, LSL and SERT were involved in a joint enterprise with or through MML to perpetrate a VAT fraud and concluded that such a possibility cannot be rejected as unrealistic (see  EWHC 1454 (Ch) paragraphs 19 – 29). That remains my view; indeed, if anything, it has strengthened somewhat as a result of the oral evidence at trial. The relevant circumstances are (1) before 4.8.11 LSL and SERT had previously traded directly with each other; (2) the pricing structure for the sales by As to MML (which were VAT exempt) and of the on-sales by MML to SERT (which attracted VAT on outputs as UK domestic sales by MML) only worked if MML treated the VAT element of its selling prices as revenue rather than tax; (3) at least in theory this enabled As to sell at an uncompetitively high price and SERT to buy at an uncompetitively low price; (4) the period and volume of trading was short and substantial; (5) As knew that the consignments were for delivery direct to SERT but it made no attempt to trade directly and cut out MML as the middleman; (6) SERT knew that the consignments were to be supplied by As but they made no attempt to trade directly and cut out MML as the middleman; (7) there were no formal contracts or terms of trade between MML and any of TBL, LSL and SERT; (8) TBL's and LSL's invoices for the supply of goods assert retention of title until paid, but no goods were ever to be delivered to MML and the evidence is silent as to any retention of title notified to SERT; and, (9) TBL, LSL and SERT are not novices in the toiletries business and each would, or may be expected to, know the difference between achievable and unrealistic wholesale prices. These factors are consistent with trading arrangements based on conscious averting of the eyes so as not to see the obvious, alternatively, deliberate joint enterprise fraud; however, that is not to say that there is not some perfectly innocent explanation. My observation emphatically is not a finding of fact that any of TBL, LSL and SERT were involved in a joint enterprise VAT fraud through or with those in control of MML, rather it is an observation that on the available material, including the written and oral evidence of witnesses involved in the management of As and SERT, such a possibility cannot be rejected as fanciful or unrealistic. All of that is no doubt under consideration by BW.
- GS faces this misfeasance application because, while liquidator of MML, she was not alive to any aspect of the fraudulent trading and because she appears to have been the victim of a separate fraud when deceived into paying out the Sum by 18 transfers in accordance, so she says she believed, with the instructions of SERT. It is for As to prove, on the balance of probabilities, that GS's conduct of MML's liquidation was in breach of duties implicit in her statutory obligations, and/or negligent and/or in breach of fiduciary duty.
- It may not be insignificant that BW appreciated MML's true business rationale within two months of appointment whereas GS had failed so to do during the 28 months of her tenure of office. However, it is essential not to start with the current state of knowledge and evaluate GS's conduct in that context or by working backwards; in other words GS is not to be judged through the vision of hindsight. Rather, it is essential to consider the allegations against GS in context.
- To this end, during the trial I asked to be provided with a copy set of GS's files as maintained by her. This has been done helpfully colour coding documents on GS's files which were not passed over to BW as her successor. I shall return briefly to these files, but at this stage I record that I spent a day reviewing this material, which runs to 3 lever arch files, over the interval between the close of evidence and the day set aside for closing submissions.
TBL, LSL and SERT
- TBL was incorporated in Malta in 2009 and LSL was incorporated in Cyprus in 2006. Both companies are owned by Mr Dildar Singh ("Mr Singh"), said to be in his 70s. The businesses of TBL and LSL are run by the owner's son, Mr Pardeep Singh Heer ("Mr Heer"), who gave evidence at the trial. Although TBL has an office address in Malta and LSL has an office address in Cyprus, all business is conducted from the UK by Mr Heer and 2 employees undertaking the record keeping / paperwork. Mr Heer's evidence is that he is not a director of either company on the advice of accountants and solicitors following a divorce in 2006 which would have been "messier" if he had been a director; quite how his divorce would have been "messier" Mr Heer was unable to say (and, I observe, is not easy to understand given that at least 1 of those companies was not even formed at the time of his divorce).
- Based on Mr Heer's evidence, As' business consists of bulk buying and selling confectionery, soft drinks and toiletries, sometimes to order and sometimes speculatively. If goods need to be held or stored, warehouse space is rented from carriers and shippers on a short term basis (at a cost of €1.75 per pallet per week) in Holland or Belgium.
- Mr Heer said that he was introduced to MML by a long standing business contact, a Mr Zaffar, in early August 2011 and that before then LSL and Quetta Developments, another company owned by Mr Singh and under Mr Heer's day to day control, had traded directly with SERT.
- SERT is a plc under the ultimate control of Mr Sabir Rashid Tayub. Its published financial statements for the year to 31.3.11 record an increase in turnover from £60million for the year ended 31.3.10 to almost £101million for the year to 31.3.11 and show net assets in excess of £20million at both year ends. SERT's accounts make clear that the increase in turnover and scale of operations was the consequence of SERT acquiring, at net book values (i.e. neutral cost), the net assets and trade of a fellow subsidiary, MST Toiletries Ltd; the impact of this acquisition appears to have been negative in the first year, in that net profits fell from £2million to £378,000. Nevertheless SERT's financial statements are those of a solvent company in a substantial way of business.
- Whether there was a prior history of trading between As and MST Toiletries was not the subject of evidence during the trial.
- Before moving on from this section of the judgment, I note and remind myself that SERT is not a party to the proceedings, its involvement, through Mr Kiran Tailor ("Mr Tailor"), now its finance director, is as a witness called by As. Accordingly, SERT and Mr Tailor did not have the benefit and shield of legal representation at the trial, a factor which I must and do take into account before expressing any view about SERT or Mr Tailor in this judgment.
- GS is a licensed insolvency practitioner. At the time of her appointment as liquidator of MML she had 30 years experience in insolvency work. Between 1981 and 1989 she worked in the Official Receiver's office in Birmingham where, as she says, she "was trained in all aspects of investigation work in relation to individual and corporate insolvency". Between 1989 and 1994 she worked in the insolvency departments of two well known accountancy firms. Between 1994 and 1998 she worked as an inspector for the Joint Insolvency Monitoring Unit. Between 1998 and 2003 she worked for and became a partner in a specialist insolvency practice; during this period GS took and passed the Joint Insolvency Examination Board examinations and thereby became eligible to obtain an insolvency practitioner's licence. In 2003 GS set up her own insolvency practice, Sharma Associates Limited, which trades as Sharma & Co. GS says that on an ongoing basis she has some 150 open cases at any time and she employs 10 staff.
- With this background, it is clear that GS is no newcomer to insolvency.
- In her written evidence GS also refers to domestic difficulties and to an injury to her back requiring extensive treatment at the time of her tenure of office as MML's liquidator. She says that she believes that this affected her ability to deal with the matters that arose during her management of MML's liquidation. The evidence is not supported by medical evidence as to the effect on GS of her difficulties or her injury and is too sketchy to have any impact on my evaluation of her conduct. Accordingly, I place no weight, for or against GS, on this point.
- In his written and oral submissions, Mr Hansen, GS's counsel, makes the point that GS's career is at stake in this trial and that she faces financial ruin if an order for repayment, restoration or compensation is made. As to GS's career, I accept that Mr Hansen may well be correct. If it were needed, and in my judgment it is not, that would be an added reason to approach the determination of this case in a way which avoids the risk of applying hindsight to reach an answer. As to financial ruin, Mr Hansen informed the court that GS is not insured in respect of As' claim because the solicitor acting for her at the commencement of these proceedings (not her present solicitor or their predecessors) failed to give notice of the claim within the time limit under GS's policy; again, that is not a consideration of any weight in these proceedings.
Issues for and approach to determination of the s.212 application
- The central issue in this s.212 application is whether GS's payment out of the Sum was a breach of a statutory duty and/or negligent and/or in breach of fiduciary duty.
- When finding and evaluating the facts, I intend to work forwards chronologically, by looking at GS's conduct in the context of (1) her pre-liquidation dealings with those in control of MML; (2) the material provided and available to GS on and following appointment as liquidator; and, (3) the further material GS (a) sought and (b) obtained over the course of her tenure of office. The focus of the court's examination into GS's conduct over the course of her involvement with MML must be to look at what she did and what she did not do and the reasons for her conduct. By following that route, I should reach a soundly based decision as to GS's compliance or otherwise with her duties.
- Consideration of these facts and matters alone will not be determinative of the s.212 application. There are 4 further issues : (1) whether, even if negligent, GS caused MML to suffer loss or damage; (2) whether the discretion to grant relief under s.212 should be exercised, and, if so, in what way; (3) if otherwise liable under s.212, whether relief should be granted under s.1157 of the Companies Act 2006 (respectively "s.1157" and "CA 2006"); and, (4) whether the claim for relief under s.212. is barred by an illegality defence.
- Before embarking on consideration of these two sets of issues, the following preliminary matters should be addressed : (1) the nature and extent of the duties owed by GS as liquidator of MML and (2) the nature and extent of the allegations of breach of statutory duty, negligence and breach of fiduciary duty.
The nature and extent of the duties owed by GS as liquidator of MML
- MML is in creditors' voluntary liquidation. The nature and extent of the core duties of a liquidator may largely be ascertained from two sections of the IA 1986 : s.107 and s.212 which provide as follows :
107 Distribution of company's propertyE+W+S
Subject to the provisions of this Act as to preferential payments, the company's property in a voluntary winding up shall on the winding up be applied in satisfaction of the company's liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company.
212 Summary remedy against delinquent directors, liquidators, etc.E+W+S
(1) This section applies if in the course of the winding up of a company it appears that a person who—
(a) is or has been an officer of the company,
(b) has acted as liquidator or administrative receiver of the company, or
(c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company,
has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
(2) The reference in subsection (1) to any misfeasance or breach of any fiduciary or other duty in relation to the company includes, in the case of a person who has acted as liquidator of the company, any misfeasance or breach of any fiduciary or other duty in connection with the carrying out of his functions as liquidator of the company.
(3) The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him—
(a) to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or
(b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.
(4) The power to make an application under subsection (3) in relation to a person who has acted as liquidator of the company is not exercisable, except with the leave of the court, after he has had his release.
(5) The power of a contributory to make an application under subsection (3) is not exercisable except with the leave of the court, but is exercisable notwithstanding that he will not benefit from any order the court may make on the application.
- As to s.107, where (as in this case) there are no preferential creditors and there will not be a surplus for distribution to the members, the liquidator's task is to apply the company's property in satisfaction of its unsecured liabilities rateably. To achieve this, a liquidator must gather in and realise the non-monetary assets, aggregate the proceeds with monetary assets, ascertain the liabilities, and distribute the available monies on an equal basis; these tasks are regarded duties implicit in s.107.
- It is common ground that GS, when liquidator of MML, owed a duty of care, enforceable through the process provided by s.212, in the performance of her duties and in the exercise of her powers. Both Mr Morgan, counsel for As, and Mr Hansen refer to Re Charnley Davies Ltd  BCC 605 and the judgment of Millett J, as he then was, at p.618D-E for a statement of the law as to the requisite standard of care :
"An administrator must be a professional insolvency practitioner. A complaint that he has failed to take reasonable care in the sale of the company's assets is, therefore, a complaint of professional negligence and in my judgment the established principles applicable to cases of professional negligence are equally applicable in such a case. It follows that the administrator is to be judged, not by the standards of the most meticulous and conscientious member of his profession, but by those of an ordinary, skilled practitioner. In order to succeed the claimant must establish that the administrator has made an error which a reasonably skilled and careful insolvency practitioner would not have made".
It is common ground that the duty of care owed by a liquidator is the same as that owed by an administrator.
- To this, having regard to the particular circumstances of this case, I would add a short extract from the judgment of Maugham J in In re Home and Colonial Insurance Company Limited  1 Ch 102, a misfeasance action under s.215 of the Companies (Consolidation) Act 1908 in respect of a large claim admitted by the liquidator which should have been disallowed, at p.125 :
" … a high standard of care and diligence is required from a liquidator in a voluntary winding up. He is of course paid for his services; he is able to obtain whenever it is expedient the assistance of solicitors and counsel; and, which is a most important consideration, he is entitled, in every case of serious doubt or difficulty in relation to the performance of his statutory duties, to submit the matter to the Court, and to obtain guidance".
- This is a case in which legal advice was obtained and that advice is relied upon by GS as providing a defence to the claim. It is also a case in which directions were not sought from the court. It may be presumed, therefore, that GS did not consider there to be serious doubt or difficulty in the performance of her duties.
- In this context, Mr Hansen refers in McPherson's Law of Company Liquidation (3rd Edn) to a footnote under paragraph 8-037. The relevant text at 8-037 is :
"This [a liquidator's fiduciary position in relation to the company, its creditors and contributories] imposes certain obligations, which are strictly enforced by the courts, identical with those resting upon trustees, agents, and directors, one of which is that the liquidator is bound to act honestly and to exercise powers bona fide for the purpose for which they are conferred …".
The added footnote is :
"A liquidator who exercises powers in good faith after taking proper advice is not open to challenge : Burnells Pty Ltd (in liq) Ex p. Brown and Burns, Re (1979) 4 A.C.L.R.213".
- Mr Morgan refers to a passage in the judgment of Lord Walker in Pitt v Holt  UKSC 26, with which the other six Justices of that constitution of the Supreme Court agreed, at paragraph 40, citing as a correct statement of the law a passage from the judgment of Lightman J in Abacus Trust Co (Isle of Man) v Barr  Ch 409 at paragraph 23 :
"What has to be established is that the trustee in making his decision has, in the language of Warner J in Mettoy Pension Trustees Ltd v Evans  1 WLR 1587, 1625, failed to consider what he was under a duty to consider. If the trustee has in accordance with his duty identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations, the trustee can be in no breach of duty and its decision cannot be impugned merely because in fact that information turns out to be partial or incorrect".
- Applying the above proposition from Pitt v Holt to the footnote in McPherson citing Burnell's Pty (in liq), a liquidator will not have taken proper advice where the instructions to the adviser were flawed (partial or incorrect) by reason of a failure on the part of the liquidator to identify relevant considerations, or a failure to use all proper care and diligence in obtaining information relevant to the instructions given, or a failure to use all proper care and diligence in obtaining information relevant to the advice obtained.
- In this case As' challenge is to the quality of GS's instructions and to the care and diligence used in obtaining information relevant to the advice sought and given.
- Referring to the judgment of Romer J, as he then was, in Re City Equitable Fire Assurance Company Limited  Ch 407 at p.429, Mr Hansen submits that in gathering information GS was entitled to proceed on the basis that "[b]usiness cannot be carried on upon principles of distrust". This brief citation was drawn, by Romer J, from a passage in the judgment of the Court of Appeal in In re National Bank of Wales Ld  2 Ch 629 at p.673, where the issue was whether a director was in breach of duty for trusting a manager and the managing director who had deceived him. In my judgment, the starting point for a liquidator should be one of neutrality, neither trusting nor distrusting directors and third parties, but forming a judgment based on information available, information coming to hand, information gathered upon making careful and diligent enquiries, and, where appropriate, information obtained by probing further or using statutory powers. Moreover, a judgment to trust once made should not be not written in indelible ink and, if circumstances change, further careful and diligent enquiries may be called for to reaffirm or re-evaluate the judgment to trust. Such an approach is no more than is to be expected of any and every ordinary, skilled insolvency practitioner.
- There are issues on the pleadings between Mr Morgan and Mr Hansen as to whether a liquidator owes any fiduciary duties and whether any duties are owed to creditors, or anyone other than the company in liquidation.
- As to the latter point, at s.212 subsections (2) and (3) refer in terms to the duties in question being owed to the company; moreover, the remedy provided by s.212 is for the benefit of the company. Creditors, who have an indirect or derived interest in the proper exercise by a liquidator of his/her duties, are authorised to hold a liquidator to account for the benefit of the company. In this case, As seek relief under s.212 for MML.
- As to fiduciary duties, s.212 refers expressly to breach of fiduciary duties in the context of wrongdoing by a liquidator. Being procedural in nature, s.212 does not create new or additional obligations or duties, rather it provides the route of recourse for breach of established obligations and duties identified therein. The remedies available under s.212 include ordering a respondent to repay, restore, account or contribute by way of compensation for money or property of the company. Moreover, it is common ground that upon appointment a liquidator becomes an agent of the company; fiduciary duties obviously flow from this. Further, the footnote in McPherson relied upon by Mr Hansen is to a passage expressly recognising that a liquidator owes fiduciary duties.
- The allegedly fiduciary based issues arising on the pleadings are (1) whether GS owed MML fiduciary duties including the duty to exercise her powers for a proper purpose; (2) whether as part of that duty, GS was required (a) not to act perversely or irrationally or for irrelevant or extraneous reasons and (b) to take reasonable steps to acquire information relevant to her decision; (3) whether GS is to be treated as a trustee in respect of the assets of MML that came into her hands or under her control; and, (4) whether the burden is accordingly on GS to prove that payment by her of the Sum out of MML was justified and/or proper for her to make. GS's defence contains a bare denial that, as liquidator, she owed fiduciary duties to MML, and a denial that she is to be treated as a trustee.
- It is difficult to follow how a liquidator, whose task is to gather in the money and property of a company and distribute it to others, is not a fiduciary. Such a person is obviously required to act in good faith, prohibited from making a secret profit out of dealings with the company's property and money, not at liberty to act out of self interest in the performance of his/her duties, and not entitled to unapproved reward. In other words a liquidator is someone owing all the hallmark duties of a fiduciary identified by Millett LJ, as he then was, in Bristol and West Building Society v Motthew  Ch 1 at p.18.
- Acting only for a proper purpose and, conversely, not acting perversely or irrationally or for irrelevant or extraneous reasons may reasonably be viewed as inherent obligations whenever a duty of care is owed, as may a duty to take reasonable steps to acquire information relevant to a decision. Indeed, Mr Hansen accepts that GS's duty of care owed to MML embraced such obligations.
- Mr Morgan contends that such duties are aspects of a liquidator's fiduciary duty to the company. He refers to Sir Gavin Lightman and Mr Gabriel Moss QC's work, The Law of Administrators and Receivers of Companies (5th Edn), at paragraph 12-037 which identifies the proper purposes obligation as being derived from the 'fraud on a power' doctrine in trust law. On this point, it is helpful to keep in mind that the essential quality expected of a fiduciary is loyalty. The exercise of powers for a proper purpose will necessarily be imbued with that quality; conversely, the exercise of a power for an improper purpose may well – depending upon the particular circumstances - be a breach of fiduciary duty.
- In my judgment it is important to keep two propositions clearly in mind : (1) breach of a fiduciary duty is marked by some disavowal or breach or betrayal of a fiduciary duty – disloyalty – by the fiduciary, and not every duty owed by a fiduciary is a fiduciary duty; and, (2) there is a difference between the improper exercise of a power and the exercise of a power for an improper purpose.
- It follows that not every perverse, irrational, irrelevant or extraneously motivated exercise of a power would be a breach of a fiduciary duty, and it may be that in a particular case the particular impropriety is not a breach of fiduciary duty; the issue in every case is fact sensitive.
- Mr Morgan puts As' case on the basis that no liquidator exercising his/her powers for a proper purpose would have behaved as GS did with the Sum, and submits that this is not a case touching or extending the boundaries of fiduciary duties.
- The extent to which a liquidator may or is to be treated as a trustee is in issue in the context of the burden of proof. Mr Morgan contends that a liquidator is to be treated as trustee of assets of the company coming into his/her hands or control and is thereby charged with a duty to justify payments out. This is denied by GS in her Defence.
- Mr Hansen submits that in view of the potentially grave consequences for GS of an adverse outcome, the application ought not to be decided on the basis of the burden of proof. To an extent I regard the question of the burden of proof as peripheral for three reasons. First, s.212 confers a discretionary power upon the court and where culpability of an office holder is finely balanced it is unlikely that the discretion would be exercised adversely to the office holder. Secondly, even if a breach of duty or fiduciary duty is established, it may still be forgiven if the liquidator's conduct was honest and reasonable. Thirdly, and developing the second point, where a loss of property or money has occurred during a liquidation (common ground in this case) it is obviously for the liquidator to explain or account for that loss and for the applicant to probe the explanation and account. That is not to suggest that the process is inquisitorial rather than adversarial, but I note that the court is empowered by s.212(3) to "examine into the conduct of the person falling within subsection (1)" that is, applied to the circumstances of this case, a person who has been the liquidator.
- Where the conduct of a former liquidator is put in issue by a creditor, it is for the creditor to identify the subject matter of the court's examination. However, in such a case, the relevant information and material is likely to be in the hands of the liquidator. That is the logical starting point of the court's examination into conduct. If, in such a case, a liquidator's explanation or account is inherently flawed or inadequate, there may be little or nothing for an applicant to prove against the liquidator; but, if an apparently credible and apparently satisfactory explanation or account is given by the liquidator, the court's examination will focus upon the creditor's challenge to that explanation or account.
- In my view, it is not productive to take a strict or prescriptive approach to the burden of proof in this application, nor is such an approach laid down by s.212. An application under s.212 charges the court with the task of examining into the conduct of the different classes of person who may be in a position to handle or control a company's assets at the various stages of its life, from foundation to liquidation. Who has to prove or disprove what will vary according to the particular circumstances and issues in the particular case. That being said, I would accept that the default setting is for an applicant to make and prove allegations.
- The route taken in this case was for the s.212 applicant (creditors in this case) to make a combined application seeking orders for (1) repayment, restoration, an account of or compensation equivalent to the Sum from GS, (2) removal of GS from office and replacement by BW, and (3) delivery up to BW of all documents relating to the gathering in and paying out of the Sum. The intention underlying that approach must have been that the court's examination would be assisted by an independent insolvency practitioner's review and report to the court on GS's dealings with the Sum.
- As already stated, the approach I propose to take is to work forwards chronologically. This necessarily involves basing my examination on GS's explanation and account of her conduct and, except where, if at all, rejected as inherently flawed or inadequate, considering GS's explanation and account in the light of As' challenge and BW's reports to the court.
- In the event, GS has provided her explanation and account of what she did and why in the form of a lengthy statement in answer to the evidence led by As' witnesses to which she has exhibited more than 1000 pages of documents.
The nature and extent of the allegations of breach of duty
- The complaint against GS is that money, the Sum, received into one of MML's bank accounts shortly before it was placed in liquidation and which should have been available for distribution to creditors was paid out by her to third parties in circumstances where (1) inadequate steps were taken by GS to ascertain MML's state of affairs at liquidation, (2) inadequate, if any, consideration was given by GS to the material available as to MML's trading, assets and liabilities, (3) inadequate instructions were given by GS to the solicitor, KT, who advised that payment could be made, (4) inadequate enquiries were made by GS as to the payees of the Sum before payment, and (5) GS failed to notice, before making payments out, that the indemnity in fact obtained was not in the required form.
- Put shortly, Mr Morgan characterises GS's fulfilment of her duties as slipshod and slapdash and her approach as being geared towards bringing about a quick conclusion to the liquidation.
- All of this is contested by GS and Mr Hansen on GS's behalf.
- Mr Hansen further contends that the nature and extent of the complaint against GS must be taken to be defined by and limited to the case as pleaded by the Amended Points of Claim. The point here concerns GS's handling of the Sum prior to making payments out. I reject the submission that no regard should be had to the unpleaded events simply for the reason that they are unpleaded, but I note and bear in mind that there is no issue or claim for relief relating to those events in these proceedings.
GS's pre liquidation dealings with MML ~ lead up to appointment (including material provided pre-appointment)
- Following an introduction by a former personal insolvency client, GS met Mr Hafeez Rehman ("Mr Rehman") at her office in Edgbaston on Sunday 28.8.11. GS understood Mr Rehman to be a de facto and/or shadow director of MML. GS provided information and forms for completion to instigate the liquidation and arranged a further meeting which she required to hold with a formal director of MML.
- Although not referred to in her witness statement and not the subject of a contemporaneous attendance note, at least not one referred to during the trial, there is a reference to what Mr Rehman told GS in a letter dated 3.5.12 which she wrote to Lexlaw solicitors, who were instructed by Mr Tariq. GS states :
"Mr Rehman confirmed to me when we first met that [MML] had ceased to trade and that the end of [MML's] life was required as [MML] had traded with a company that was the subject of a SOCA investigation. He was worried about the implications".
- The evidence is unclear as to what, if anything, further GS either asked or was told about the company said by Mr Rehman the subject of the SOCA investigation.
- On the morning of 30.8.11, the date fixed for a meeting with a registered director of MML, GS or an assistant caused an online company search to be made in relation to MML. GS says that she reviewed this before her meeting. The details of appointments and resignations of directors, including Mr Tariq, are unusual. GS agreed in cross-examination that this should have triggered a concern on her part which she should have investigated.
- The meeting with a registered director at GS's office was attended by Mr Faruq Abdullah Tariq ("Mr Tariq") and Mr Rehman. GS did not meet and has never met any other registered director of MML. At this meeting, for identity and money laundering regulation purposes, GS made a copy of Mr Tariq's passport and one of his business credit cards. She also obtained a copy of the passport of another director, Mr Savankumar Patel ("Mr Patel"). She did not obtain any identification for Mr Rehman which, in cross-examination, she admitted was a mistake.
- During the meeting, GS was told by Mr Tariq that he had purchased MML's shares in April 2011 for £700 and began trading almost immediately; that he personally had invested £150,000 in MML to purchase stock and trade as an importer and exporter of toiletries; and, that trading went well until July 2011 when the main company with which MML had traded suddenly ceased to trade resulting in a £100,000 loss of stock that had already been supplied - this customer had disappeared after delivery of the stock. In her oral evidence, GS referred to Mr Tariq telling her that he was concerned about innocent involvement in MTIC fraud.
- GS does not appear to have asked or been told the name of the company that had traded with MML and was said to be under investigation. However, she had been told, and apparently registered, that it was MML's main customer.
- During this meeting Mr Tariq completed GS's standard form Initial Company Information questionnaire. Mr Tariq stated the trading period to have been 4/09 to 8/09, GS does not appear to have noticed the misdating of the year. He also identified the shareholder as Mr Patel, HSBC as the only banker, and did not identify any accountant acting for MML. In cross-examination, GS said that she had not checked the uncompleted parts of the form but she had noticed the inconsistency as to share ownership which she had clarified with Mr Tariq; that may well be so, but GS made no contemporaneous note. She may, or should, also have noticed the inconsistency as to bankers because Mr Tariq gave GS his MML NatWest Visa card to copy or included a copy of this card in the documents handed to GS on 30.8.11. As to MML's accountants, when GS obtained a copy of MML's financial statements, which she or an employee of Sharma & Co under her supervision downloaded before 21.9.11, it would have become apparent that MML purported to have accountants; had contact been made with those accountants, who would have been an obvious source of financial and trading information about MML, the response would have been that in fact they were not MML's accountants.
- The meeting on 30.8.11 was treated as a board meeting of MML "at which it was acknowledged that [MML] was insolvent and that steps should be taken to place [MML] in Creditors' Voluntary Liquidation". GS was instructed to advise and assist in the preparation of a statement of affairs as at 21.9.11, to prepare for and advertise the meeting of creditors, and to open a bank account and pay and transfer and pay in all monies received by MML. GS prepared the paperwork for the creditors' meeting and obtained Mr Tariq's signature as necessary. GS agreed to undertake this work for a fee of £4,500 plus VAT.
- At some point during the meeting, Mr Tariq handed over a small folder comprising some 80 pages of documents which he said were MML's books and records. GS did not go through these documents with Mr Tariq and Mr Rehman during the meeting. Although not noted, GS's evidence is that Mr Tariq informed her that he was the only creditor. GS's evidence is that this meeting lasted 15 to 20 minutes.
- Notice of the meeting of creditors was issued on 1.9.11 and was publicly advertised.
- GS says that after the meeting she reviewed the documents said to constitute MML's books and records. GS has exhibited a schedule purporting to be a list of those documents. As was pointed out in cross-examination, that schedule refers to NatWest bank statements for a period ending after 30.8.11, thus it cannot be an accurate or contemporaneous list of the documents handed over. Nevertheless, the list and the documents exhibited by GS as copies of the documents handed over provide a clear enough indication of the information about MML available to GS at that time. The documents comprised correspondence and incomplete statements relating to accounts with NatWest and HSBC, source records relating to sales to SERT, and VAT registration documents, but not a copy of MML's financial statements.
- The NatWest documents show that a business account was opened in June 2011 and the statements from commencement to 23.8.11 show low level activity, funded mainly by MML (£13,500 odd), Mr Ali (£3,000) and one credit (£7,000), and payments for transport and travel, cash withdrawals, a transfer to FT Management (£4,999) and 3 other debits (totalling some £4,900). There is nothing in these NatWest documents to indicate that it was used by MML as a trading account.
- The HSBC documents show that a business account was opened in May 2011. The then available bank statements cover the period 18.5.11 to 4.8.11 (missing sheet no.3 which must show a net receipt of £2,554). Prior to 6.7.11 there is only minor activity, personal cash withdrawals and minor payments (eg Tesco). Entries for 6-8.7.11 show receipts in excess of £101,000 from Stargate UK Ltd being paid out on the same day to Cobblefret and to Swift Valley Trading. What follows is three and a half weeks of intense activity : receipts in excess of £1.9million, payments out in excess of £1.8million. Of the receipts, almost £1.8million is shown as received from SERT UK PLC, £76,376 is shown as received from MMB Supplies Ltd and £71,878 is described only as a cheque received. Of the payments, transfers excess of £1million are identified only by reference to payment codes, £38,188 was returned to MMB, in excess of £191,000 was paid to Lunasol Hispania, in excess of £167,000 was paid to Swift Valley Trading, £124,536 was paid to Quetta Developments, and £80,000 was paid to LSL. There are other identified payments (including a transfer to MML funding the NatWest account) and bank charges. On 5.8.11, MML had a balance in hand at HSBC in excess of £74,000.
- The HSBC documents also include statements for Mr Tariq's business credit card. These show personal payments, a purchase at Heathrow duty free and the purchase of a BA flight ticket on the same day to Glasgow and a return on the following day both in the name of Mr Rehman. From this it would appear that Mr Rehman had the use of Mr Tariq's HSBC card (or, possibly, that Mr Tariq travelled as Mr Rehman).
- Extracting the above information from the bank statements would not have taken GS any longer than the time spent meeting with Mr Tariq on 30.8.11. The information revealed obviously calls into question Mr Tariq's account of MML's business and its downfall. It identifies MML's main customer, the company said by Mr Tariq to have "disappeared", as SERT. It also makes clear that sales to SERT were sales to a domestic company, not export sales, and therefore subject to VAT.
- That SERT was and should have been identified as MML's main customer was put to GS by Mr Morgan in cross-examination and GS agreed that the material handed to her by Mr Tariq identified the main company with which MML had been trading as SERT and she continued "I was not looking at that. I was looking at a trust claim". If that is correct, it constitutes an admission by GS that she paid no real attention to MML's documents, such as they were, at this stage.
- During re-examination Mr Hansen referred GS to her letter dated 3.5.12, in which she referred to her instructions to put MML in liquidation because a company with which it traded was subject to a SOCA investigation, and asked GS whether that company was SERT; GS's answer was that on 30.8.11 she was told that the company was Quetta Developments. This answer makes no sense at all. The stock loss described by Mr Tariq was of stock which had been supplied (i.e. sold) by MML but not paid for, not of money paid by MML for stock (i.e. purchased) that was not delivered. Quetta Developments was a supplier to MML, not a customer; the main customer was SERT. If GS had been told by Mr Rehman that Quetta Developments was MML's main customer, 20 minutes reviewing the documents handed over by Mr Tariq would have revealed that to be incorrect. In fairness to GS, at this point she had been giving evidence for the best part of two days and was clearly fatigued.
- Certain documents relating to trading with SERT were also handed over to GS on 30.8.11. These are 16 matching SERT purchase orders and MML sales invoices relating to consignments of razors, Red Bull, and one consignment of Dettol. The purchase orders cover the period 20.6.11 to 15.8.11 and the invoices were raised over the period 22.6.11 to 16.8.11. The total value of the transactions is almost £3.5million. Each and every MML sales invoice to SERT is a tax invoice for VAT purposes and, therefore, the total VAT on outputs on the invoices handed over to GS is in the order of £583,000. The MML invoice numbers indicate that there were 26 other MML sales invoices issued before 16.7.11; these other invoices were not provided to GS.
- Reviewing the SERT documents and extracting the above information and linking it to what had been said by Mr Tariq about MML's trading and about SERT and apparent from the bank statements in GS's possession would not have taken an ordinary, skilled insolvency practitioner more than two hours. What is obviously revealed by the documents provided to GS is a need to bring the bank information up to date and to ascertain whether SERT should be regarded as a substantial debtor or whether there were further substantial funds in or passing through MML's bank accounts.
- It does not appear to have occurred to GS at this point to make any enquiry – not even a simple internet enquiry or an online search via Companies House – as to the existence or demise of SERT.
- The VAT documents provided to GS (registration certificates and a copy of a re-registration application form) show that MML was registered for VAT with effect from 1.1.10 with a requirement to submit VAT returns quarterly. Mr Tariq and Mr Patel applied for MML to be re-registered on the transfer of the business as from 1.6.11. On VAT Form 68, in response to a request for an explanation why no outputs were recorded on returns for the quarters ended 1/11 and 4/11, the response given is "NO". The information on this form also includes a statement that turnover in the year from 1.6.11 was expected to be in the order of £80,000; this confirms that VAT returns would be required. GS's evidence is that she did write to HMRC to ask whether HMRC was a creditor for VAT and was told that there was no liability. What GS plainly did not do was inform HMRC of the substantial trading apparent from the documents provided to her. By 30.8.11 MML should have prepared a VAT return for the quarter to 31.7.11; Mr Tariq did not provide such a return and GS did not ask for it nor, so it would seem, did she turn her mind to what it should or might contain.
- Following the meeting GS contacted both HSBC and NatWest to give notice of the 21.9.11 creditors' meeting which inevitably resulted in the freezing of MML's bank accounts. This had the effect of capturing two receipts totalling £548,074.56 (i.e. the Sum) received into the NatWest account by transfer from SERT on 9.9.11 and 15.9.11. On 19.9.11 Mr Rehman told GS that he had tried, unsuccessfully, to withdraw the funds transferred in by SERT; this does not appear to have caused GS to question Mr Rehman's reliability. Evidently Mr Rehman approached GS with a view to cancelling the liquidation and continuing to trade MML. GS advised that it would be quicker and cheaper to allow the liquidation to continue and that because Mr Tariq was the only creditor the funds would flow back to him and/or the shareholders in any event. GS understood Mr Rehman to be content with that approach. Thus, as the creditors' meeting loomed, GS understood there to be a further £548,000 odd in MML's coffers and, on the available information, no related liability.
- Although not referred to in her evidence, and as already noted, at some point before 21.9.11 GS also obtained a copy of MML's accounts as filed at Companies House. The purpose appears to have been or to have included extracting information in the course of preparing a Directors' Report for the Statutory Meeting of Creditors scheduled for 21.9.11. GS recorded 2 hours on 21.9.11 as time spent reviewing the statement of affairs and the meeting pack.
- MML's financial statements were signed off on 1.8.11 and filed at Companies House on 13.8.11. They purport to cover the year to 21.2.11 and to relate to MML's first period of trading. The director signatory is Mr Patel. The principal activity of the company, required to be stated in the Director's Report, is left blank. The profit and loss account reveals turnover in excess of £456,000, cost of sales and administrative expenses in excess of £415,000, and net profit in excess of £41,000. The balance sheet discloses plant and machinery at a book value of almost £11,000, debtors of £25,600, cash in hand in excess of £6,500 and non-trade creditors of £1,600.
- The trading reported in these financial statements raises an obvious question as to why VAT returns for the quarters ended 1/11 and 4/11 recorded outputs at £nil. This does not appear to have occurred to GS.
- The very fact of trading as reported in MML's financial statements also showed the lie to Mr Tariq's statement on 30.8.11 that trading had only commenced after he purchased the company in April 2011.
- The financial statements also include a detailed trading and profit and loss account which discloses wages payments totalling £39,800. The folder handed over by Mr Tariq did not include any PAYE records and there is no indication that any details of employees or PAYE/NI records and payments were sought, not even to confirm that there were no employees after Mr Tariq acquired MML and there were no outstanding wage related liabilities. In my judgment, enquiries of this sort arising out of material obtained from Companies House ought to be standard for any competent insolvency practitioner in the process of taking on a new appointment and preparing a statement of affairs.
- The Directors' Report for the Creditors' Meeting runs to 7 pages. Mr Tariq is said to have been a director from 4.4.11 to the date of the meeting and Mr Patel to have been a director from 25.5.11 to the date of the meeting. No mention is made of the unusual terminations and reappointments. The reported trading history repeats the story as told by Mr Tariq. MML's failure is attributed to "Loss of stock".
- The statement of affairs comprises 3 items having a value : cash at bank £6,380.00, unsecured creditors (loan from Mr Tariq) £150,000, and share capital £8.72. MML's plant and machinery (whatever it was) appears to have been overlooked entirely. The documents handed over to GS by Mr Tariq did not include anything to evidence the existence of an investment by way of loan of £150,000, or even £1. HMRC are recorded as £nil creditor balances.
- Notes to the Directors' Report under the heading "Bank Balances" state that :
"No bank statements have been made available for the account held with HSBC Bank and Natwest Bank Plc, and so it is not possible to detail the month end bank account balance movement for creditors' information. These movements will be reviewed by the duly appointed Liquidator, who will request copy statements from the bank direct".
This paragraph was drafted by GS or an employee of Sharma & Co on her behalf.
- On the information GS held at 21.9.11 both the statement of affairs and the note relating to bank balances are materially inaccurate.
- In her written evidence GS states that she should have updated the statement of affairs to reflect the receipt of the Sum and offers the explanation that she must have prepared the statement at an earlier date and overlooked the need to update it. This explanation sits unhappily with her time record for 21.9.11 allocating 1 hour to reviewing the statement of affairs which, as already noted, has only 3 active entries (cash at bank, director's loan, and share capital).
- The final section in the Directors' Report for the 21.9.11 meeting drafted by GS, or a part qualified accountant employed by her company and subject to review by GS, is entitled "Deficiency Account". The principle of a deficiency statement is straightforward enough : the starting point is the last known net asset position taken from a reliable source; the end position is the net deficiency shown on a statement of affairs (the underlying assumption being that some care has been taken in the preparation of the statement of affairs); the difference is explained by net trading loss and/or net losses relating to assets and/or additional net liabilities. The narrative in MML's Deficiency Account states, incorrectly, that the starting point is the profit and loss account; fortunately though, the schedule takes the correct (in principle) starting point, the net assets from MML's balance sheet at 21.2.11. However, the assumed trading loss is calculated incorrectly by adding the deficiency caused by the stock loss reported by Mr Tariq (-£58,572) to the deficiency shown on the statement of affairs (-£143,629) to produce an assumed trading loss (-£202,201); this calculation makes the elementary error of double counting the deficiency caused by the stock loss (-£58,572). Even without that error, its integrity depends entirely on the validity of the starting and ending figures. Giving her oral evidence under cross-examination by Mr Morgan and in answer to questions from me, GS was unable to give a coherent explanation of the Deficiency Account, which was prepared by her or an employee of Sharma & Co under her supervision. In a sense, that is unsurprising, it is fundamentally flawed and meaningless.
- Taking stock of the position as at 21.9.11, (1) I find it difficult to accept that GS had in fact reviewed the documents provided on 30.8.11 by Mr Tariq; (2) even from the information imparted at meetings with Mr Rehman and Mr Tariq, it must – or would - have been obvious to any competent insolvency practitioner charged with preparing a statement of affairs and expecting to take on the role of liquidator of MML that the information presented by them was unquestionably inadequate and very probably unreliable; (3) no more than a couple of hours work, which is less than GS recorded, and a moment's thought by GS about the balances at MML's bank accounts and the statement of affairs as drafted should have caused GS to conclude that there was something seriously awry or unexplained about MML's financial position; and, (4) GS's promulgation of the Deficiency Account as drafted reveals a troubling lack of insight into and competence in the assessment of insolvency.
GS's conduct in the context of the material provided and available to GS on and following appointment as liquidator up to payment out of £148,000 from the Sum on 30.11.11, including further material (a) sought and (b) obtained over the period 21.9.11 to 30.11.11
- The meeting on 21.9.11 was not uneventful. The records of the meeting prepared by GS state that Mr Tariq was present, that he chaired the meeting and that he signed the minutes of the meeting. That is not correct. GS's written and oral evidence is that he was available via his mobile phone and that he was in hospital. During cross-examination GS's evidence was that her records were "unacceptable, but no one was prejudiced".
- Accepting that there is no duty on a liquidator designate to investigate the affairs of a company before appointment, any insolvency practitioner taking on the role of liquidator of MML must – or should – have appreciated that reviewing the available information and obtaining further basic, objectively reliable information (in particular bank statements and copy returns to HMRC) at a very early stage would be essential to the due performance of a liquidator's duties; and, afterall, that, at least in relation to bank statements, is what GS said she would do in the documents prepared for the 21.9.11 meeting.
- The evidence in this case is that (1) GS did not write to MML's banks to request up to date bank statements until March 2012 and (2) GS did not engage in considering MML's VAT or other tax position beyond inviting HMRC to submit proofs in response to which they replied that they were not creditors. In the light of the lead up to the meeting at which GS was appointed as liquidator of MML, these are serious shortcomings.
- On 22.9.11 Mr Tariq sent an e-mail to GS stating that SERT had requested repayment of the Sum and asking GS to facilitate this. This request prompted GS to seek advice from KT at Gateley, which she did by e-mail instructions sent on 28.9.11. The receipt of the Sum is described in GS's instructions to KT as "advance payment for supply of stocks" which the purchaser tried to recall once aware that MML was no longer trading but which had been frozen pending the liquidation and was then held to GS's order. Mr Tariq, referred to in GS's instructions as the director, was said to want to reverse the liquidation and commence trading again. GS advised that the only creditor known to her and the director was the director in the sum of £150,000. KT replied on 29.9.11 and outlined the nature of a Quistclose trust. KT also advised that :
"The customer would need to be able to show that the future orders had not already been confirmed and that the monies were not simply settlement of a debt. It is therefore crucial to investigate the circumstances surrounding payment of the moneys. You will need to establish what exactly the funds were to be used for and on what terms they were paid to the company …
It is up to the customer to prove its case to you".
- In her written evidence GS states that the request for repayment seemed to make sense because she did not imagine that the Sum had been paid in respect of a transaction made days before the decision to place MML in liquidation.
- An appreciation of the trading revealed by the bank statements in GS's possession and recollection of the reason given for MML's failure (stock loss to the main party to which MML supplied stock) would have sounded the alarm. Even thought about the unusual circumstances of the initial approach (concern about a SOCA investigation and unwitting implication in MTIC fraud, the unusual history of appointments and termination of directorships at MML, and the inconsistency between what Mr Tariq had stated and what MML's financial statements showed about its trading history) would – or should – have caused GS to pause and consider the extent to which she could rely on the statements of Mr Rehman and Mr Tariq. Further, on 11.10.11 GS received a proof of debt from HMRC in the sum of £640 for VAT which she appears simply to have accepted without reflecting on MML's trading activities and the need for a VAT return for the quarters to 31.8.11 and 31.10.11, the latter of which appears to have been left uncompleted and filed away by GS or staff under her supervision. These are omissions which weigh against GS.
- Having been advised that the Sum might be subject to a Quistclose trust and to investigate the circumstances surrounding receipt of the Sum into MML's bank account, GS wrote to SERT on 19.10.11. However, there is a factual dispute which might impact on consideration of GS's dealings with SERT and which I should resolve at this point.
- The factual dispute concerns when GS met Mr Heer and discussed As' claim to be creditors for goods recently delivered to SERT; the alternative dates are 17.10.11 (As' case) and 29.11.11 (GS's case). GS and Mr Heer agree that they did not meet on both days. There is no time record in GS's time ledger for a meeting on either day.
- Unfortunately neither GS nor Mr Heer gave a straightforward and obviously reliable account of the meeting. Mr Ghuman, who gave evidence that he accompanied Mr Heer, was plainly nervous throughout his short time in the witness box and, as Mr Hansen submitted and Mr Morgan acknowledged, he spent almost the entire time yawning. In her oral evidence, GS denied that Mr Ghuman was the person who accompanied Mr Heer. Mr Ghuman's evidence is of no assistance in determining this factual dispute.
- GS's difficulty arises from cross-examination about a telephone message taken by a Sharma & Co employee on 17.10.11 at 14.45 noting that on 14.10.11 NatWest had sent a reply to GS's letter closing MML's account and that NatWest would account to GS shortly and requesting that GS return the call. Asked about returning the call during cross-examination, GS's answer was :
"I returned the call to NatWest after meeting Mr Heer at 3pm on 17.10.11. … No, sorry, there was no meeting then with Mr Heer".
- More generally, on being taken through Mr Heer's written evidence in detailed cross-examination, GS gave coherent and credible responses challenging a number of Mr Heer's factual assertions about what transpired at the meeting.
- Some assistance is to be derived from GS's and Mr Heer's written evidence in earlier proceedings between As and GS concerning As' claims to be creditors (case No. 8264 of 2012). GS's witness statement makes no reference to a meeting with Mr Heer and states that the first contact on behalf of As was made by Mr Rehman, not Mr Heer, on 29.11.11. Mr Heer's written evidence in that action also makes no reference to a meeting with GS (whether on 17.10.11 or 29.11.11 or at all). He does refer to and purports to exhibit correspondence between 21.9.11 and 23.12.11, but in fact the earliest written communication appears to have been a fax from As on 1.12.11. Mr Heer's omission is the more surprising because his statement is the evidence by which As sought to establish their claim to be creditors of MML and a meeting shortly after the commencement of MML's winding up at which such a claim was enunciated would obviously have been relevant. GS's evidence at least leaves open the possibility that there was a meeting on 29.11.11 after Mr Rehman made contact and has the merit of identifying a consistent start date.
- My overall impression of GS's oral evidence is that on the first day of giving evidence she gave an essentially honest account in answer to questions; she did not take issue with the duties and powers of a liquidator as put to her by Mr Morgan; she made appropriate concessions as to shortcomings in performance of the tasks and duties; and she acknowledged mistakes when pointed out to her in cross-examination. The questioning on this day centred on the period up to the point when KT advised on 25.11.11 in relation to payment of the Sum. On the second day, GS initially continued in the same vein, acknowledging mistakes that were left uncorrected and errors in her oral evidence on the previous day, albeit that she generally classed them as inconsequential. During the early part of this second day GS was cross-examined about her account of the meeting with Mr Heer which she maintains occurred on 29.11.11; I regard that evidence as generally but not entirely reliable (I reject GS's evidence that she was effectively imprisoned in the meeting room by Mr Heer and the person accompanying him, although I accept and find that Mr Heer was aggressive in his tone and manner and that, in consequence, GS felt uncomfortable in the meeting) and her admission that there was a meeting on 17.10.11 (as quoted above) as a mistake. However, when the questioning worked through GS's dealings with and the payment out of the Sum, GS became at times combative and at other times defensive; consequently, she engaged less openly with the questioning and her evidence became less than satisfactory.
- The weaknesses in Mr Heer's account of his meeting with GS include the impromptu way in which he says he heard of MML's liquidation on 17.10.11 (during a telephone call with Mr Zaffar who also provided GS's address and contact details).
- I also find Mr Heer's evidence that, being concerned about a number of unpaid invoices and accompanied by his colleague and relative Mr Ghuman, he immediately went over to GS's offices to find out if his invoices would be paid unconvincing. Notwithstanding his concern about unpaid invoices, he accepted in cross-examination that he did not take any invoices or statements with him. Rather his evidence is that GS left the meeting to fetch documents and upon her return they continued discussing the outstanding invoices. That makes no sense because GS had not received any TBL or LSL invoices from Mr Tariq. GS's evidence is that she did not leave the room during her meeting with Mr Heer and, as noted above, I accept GS's evidence on that point.
- Mr Heer's evidence is also to the effect that GS admitted that the liquidation was brought about by her creating a creditor in the form of a director's loan by Mr Tariq in the sum of £150,000. Mr Heer also said that Mr Waheed and an Eastern European man who was not introduced also came into the room during the meeting. I regard GS's denials of these allegations as reliable. Indeed, it would be extraordinary for a liquidator to volunteer to a pressing creditor that the liquidation had been fabricated.
- My overall impression of Mr Heer is that he is prepared to say anything, whether or not on oath, to further his business interests. In consequence, I cannot safely rely on his evidence where in conflict with that of GS. That is not to be taken as a finding that consignments of razors and soap giving rise to the claims of TBL and LSL to be creditors of MML were not supplied to SERT; they may well have been, and that may well explain Mr Heer's attempt to discredit GS in his evidence.
- It being common ground that there was a meeting at which Mr Heer pressed for payment and that a finding of fact is required being between two specific alternative dates, my finding on the evidence before me is that the meeting occurred on 29.11.11 not 17.10.11. In relation to GS's evidence in case No. 8264 of 2012, I conclude that either GS is mistaken as to who first made contact on behalf of As on 29.11.11 or that, after Mr Rehman had made contact, Mr Heer attended at GS's office.
- Returning to GS's letter to SERT of 19.10.11 and her investigation into the obligation to repay the Sum, GS's letter is addressed to the Financial Director of SERT and asks for an explanation of the circumstances in or on terms on which the Sum was paid into MML's bank account. GS explained that the 'tick' marking in the space for her signature on the file copy of this letter was made by her secretary who thereby recorded the sending out of the letter in the post; I find that is what happened. This is important because Mr Tailor, who is now the finance director of SERT and was then its financial controller, maintains that neither he nor any other officer at SERT knows anything about the circumstances by which GS came to pay out the Sum; under questioning, Mr Tailor acknowledged that he could not speak with any authority as to the knowledge of SERT's directors. Based on Mr Tailor's evidence, GS's letter of 19.10.11would, upon receipt at SERT, have found its way to Mr S R Tayub or possibly Mr H Patel, SERT's then finance director.
- In general terms, Mr Tailor was uncomfortable giving oral evidence. No doubt this was in part because he was cross-examined by Mr Hansen on the basis that SERT and/or he were complicit in a fraud by which the Sum has been paid out and lost. Unlike Mr Heer, he did not have the benefit of counsel and solicitors in court. Mr Tailor accepted that, if posted by GS, there was no reason why her letters to SERT would not have arrived. He was adamant that he had not seen them. No enquiries had been made of Mr Patel, who had since left SERT. As to GS's correspondence being addressed to him as finance director, Mr Tailor said that he did not know of his promotion to finance director until early December 2011, but he could not say when the existing directors would have decided to offer him the post. He was adamant that letters addressed to him personally did not reach him.
- He was however caught out over when he first knew that As were claiming that the Sum was related to goods supplied by As to SERT by agreement with MML (to which I shall return later in this judgment). Mr Tailor was adamant that he personally was not a party to any fraud involving the Sum; he also did not believe that SERT was a party, but accepted that he was not in fact in a position to speak with knowledge for SERT or anyone but himself.
- The conclusion that I draw from this aspect of Mr Tailor's evidence is that the evidence from SERT that the letters written by GS were not received at SERT's main office is not sufficiently cogent or reliable to support such a finding. Exactly what happened to them thereafter cannot be deduced from the available evidence.
- Overall, I do not find Mr Tailor to be an impressive or wholly reliable witness.
- In response to her letter of 19.10.11, or apparently so, GS received a phonecall from someone identifying himself as Mr A R Tayub, who was then and is a director of SERT, who requested a meeting to discuss the questions raised by GS in relation to the Sum. The meeting occurred on 1.11.11 and GS now knows that the person who introduced himself as Mr A Tayub was an impostor; he was accompanied by another man who was introduced to GS only as an adviser. As a result of the meeting GS accepted and noted that the Sum had been received by MML in respect of "future orders …. not for payment of outstanding invoices … Funds purely for supply of goods – no other reason". GS's post meeting note to herself included that there was a "strong argument payment of funds for specific performance … will likely have to return". GS accepted in cross-examination that her written evidence that at the 1.11.11 meeting she insisted upon receiving an indemnity before releasing the Sum was not correct.
- GS's time records indicate that the meeting lasted for 2 hours and that she spent a further 2 hours "dealing with trust funds". Prior to the meeting, and within the overall time, GS downloaded a company search of SERT, including its latest annual return and its financial statements for the year to 31.3.11, by reference to which GS concluded that SERT was a "substantial company and able to pay sums of money paid". In relation to the time recorded for the meeting, GS's oral evidence is that the meeting lasted 30 minutes and the rest of the recorded meeting time was spent in discussion with KT. There is no record of that, as GS acknowledged in cross-examination. Curiously, GS's next written contact with KT was by e-mail on 22.11.11 in which no mention is made of the meeting on 1.11.11 or of any discussion with KT, e.g. to pick up on points which he may have made. Rather the e-mail is structured and phrased as a follow on from KT's initial advice e-mail by which GS was advised to investigate the customer; that is what her e-mail concerns. However, it is clear that GS is not a methodical record keeper and that GS had an established informal approach to contacting KT for advice; it is possible that after the meeting GS contacted KT to report her impression that SERT had a strong claim to repayment, but, if so, I do not accept that anything in the order of 1.5 hours was spent in such discussion for reasons including that it was neither noted on her contemporaneous attendance note of the 1.11.11 meeting nor referred to in her next e-mail to KT.
- GS was cross-examined about SERT documents in her possession since 30.8.11, namely SERT's purchase orders and MML's invoices, which show that the trading pattern between SERT and MML was that monies were paid by SERT after receipt of goods and not for future orders for goods. At this point in time, early November 2011, GS had been in office as liquidator for some 6 weeks and was acting on legal advice to investigate a claim by a customer for repayment of monies said to have been paid in advance for goods not yet ordered. She could and should have checked the documents handed over by Mr Tariq to see whether MML's records, such as they were, confirmed, contradicted or did not bear on what she was told on 1.11.11. The only conclusion that I can reach is that GS did not check these documents.
- I pause here to note that GS's meeting with SERT and her conclusion as to its substance financially did not trigger any warning bells in relation to Mr Tariq's account of MML's downfall.
- A fortnight later Mr Rehman contacted GS and arranged a meeting on 16.11.11. GS's evidence is that at that meeting Mr Rehman proposed that they split the Sum 50:50. In her witness statement GS records some of her thoughts at this time which include : (1) that as from 22.9.11 she had assumed that Mr Rehman was assisting and involved with SERT in reclaiming the Sum, and (2) the illicit proposal made no sense if the Sum "had been duly paid to MML in the course of business". What she does not appear to have done is reflect upon Mr Rehman's reliability or MML's affairs more generally.
- GS said that at various times she had been trying to contact Mr Tariq but had been unsuccessful, and also that she had not managed to make any contact with Mr Patel (a director of MML).
- On 21.11.11 GS received a letter ostensibly from SERT referring to the meeting on 1.11.11, asserting a Quistclose type trust, and demanding repayment of the Sum. The letter purported to be signed by and bears Mr Tailor's name as finance director. Mr Tailor denied any knowledge of the letter, denied that the signature was his, and pointed out that he was not the finance director of SERT at that time. The annual return and financial statements for SERT in GS's possession did not identify Mr Tailor as a director and GS did not make a further company search of SERT's directors. There is an issue as to whether this letter was delivered by hand or through the post; my conclusion, having heard GS's evidence, is that she cannot say with any degree of certainty how this letter came to be delivered to her office. Mr Rehman, a candidate for courier, bold though he may have been was not so bold as to surface as a witness.
- The initial importance of the letter is that it prompted GS to give further instructions to KT for advice. GS's time records show that she spent 7 hours on 22.11.11 and 2 hours on 25.11.11 reviewing the claim that the Sum was subject to a trust.
- GS's e-mailed instructions to KT included, as an attachment, a copy of the letter received on 21.11.11 ostensibly from SERT and a copy of SERT's financial statements. GS informed KT that she had investigated the trading relationship between SERT and MML and was in a position to state :
"1. The bank statements of [MML] clearly demonstrate a long standing trading relationship and funds being remitted prior to orders being placed
- All invoices have been discharged – obviously – as orders were paid for in advance
- No orders had been placed before the final sums were remitted
- The purpose of what the monies were remitted for has not been achieved as goods have not been sourced or provided
The only creditor in the liquidation is the Director and he also verifies the trading relationship and states that the funds should be returned. No other creditor has come forward, and as a matter of course HMRC were notified but there appears to no (sic) other debts outstanding.
There are no 'spare' monies in the liquidation to enter in to expensive litigation. On the foregoing basis, it appears that I should return the funds… Can you please let me have your views as soon as possible please?"
- During cross-examination GS accepted that KT would have relied upon her instructions as to the factual background when giving advice and that her e-mail contained mistakes. In fact GS's instructions to KT were materially inaccurate. MML's records, including SERT's purchase orders, demonstrated that orders had always been placed before any payment was made. GS did not contest that there was no evidence that Mr Tariq was a creditor, her explanation was that such evidence was not required until a dividend was to be declared; this completely misses the points that (1) GS implicitly instructed KT that there were no third party creditors which in turn confirmed the instruction that MML received the Sum in respect of future orders and (2) GS expressly instructed KT that there were no other claims on the Sum. The reference to HMRC is factually incorrect (a claim had been lodged, albeit for only £640) and, more significantly, HMRC had sought at least one VAT return, that for MML's last trading quarter, and an earlier return that to 31.7.11, had fallen due after GS had been engaged to assist in placing MML in liquidation with a view to becoming liquidator.
- When challenged that she had not mentioned Mr Rehman's proposal on 16.11.11, GS replied "[KT] knew all along. We had almost daily conversations". That statement does not sit comfortably with the opening sentence of GS's e-mail to KT "I hope that you had a good holiday and are now back refreshed". The import of that greeting is that GS had not been in communication with KT for a number of days. Although I recognise the possibility of such communications, my general finding as to GS's evidence about the frequency and nature of her communications with KT at and after this point in time is that I cannot be not confident as to the fact or subject matter of any such communications in the absence of some supporting documentation; and, I specifically reject as unreliable GS's evidence that between 16.11.11 and 22.11.11 she had told KT about her meeting with Mr Rehman. On these points I bear in mind that during the trial GS produced a previously undisclosed e-mail and a previously undisclosed file note evidencing communications in February and March 2012 not referred to in her written evidence but recalled during her oral evidence; I also bear in mind that the file note was produced after the close of evidence and could not be explored or tested in cross-examination. All of that being said, the only point which really counts against GS for the purposes of my decision is that her instructions to KT on 22.11.11 were fundamentally flawed, and, in my judgment, that is significant.
- It is clear from KT's reply that his advice that the Sum could be refunded subject to an indemnity to protect against future claims by creditors was based on GS's express instructions as to the particular factual matrix; and it is clear that KT had read the attachments to GS's e-mail (he refers to the indemnity also being obtained from SERT's parent).
- Over the next few days Mr Rehman intervened, purportedly on behalf of SERT, and may have acted as a go between or courier delivering documents between SERT and GS.
- GS notified KT and he advised "We need to get to the bottom of this before you can deal with the money". At 17.14 on 25.11.11 GS sent an e-mail to KT advising that she had received the indemnity duly signed and at 17.26 KT replied "It looks fine to me Gagen. You can now send off the funds". Neither GS nor KT (assuming, as GS says, she scanned and attached the signed indemnity to her e-mail) noticed that the indemnity was not as drafted by KT in that it omitted reference to SERT requesting repayment on the basis that the Sum was held on trust by MML for SERT.
- On 25.11.11 GS also wrote a letter addressed to Mr Tailor at SERT confirming that the Sum would be repaid and requesting payment instructions. Mr Tailor denied that the letter reached him.
- On 29.11.11, as I have already found, Mr Heer and another person attended at her offices without an appointment. GS says that Mr Heer claimed that he (presumably his shorthand for As) were entitled to the Sum for goods supplied directly to SERT by arrangement with MML. GS says that during the meeting Mr Heer repeatedly telephoned Mr Rehman to complain that he was not present. After the meeting GS spoke to Mr Rehman, returning his call, and for the first time Mr Rehman asserted that TBL was a creditor of MML. GS's evidence is that at this point she concluded that she could not trust either Mr Rehman or Mr Tariq, whom she had apparently tried to contact on more than one occasion without success.
- On 30.11.11 GS received a hand delivered letter, on what appeared to be SERT notepaper and apparently signed by Mr Tailor, instructing the transfer of some monies from the Sum, namely £67,523.00 to an account in the name of Great Volume Ltd at an account with Bank of China HK and £80,477.00 to an account in the name of Maxsky Investment Company also with Bank of China HK.
- In cross-examination, GS accepted that KT's advice had been that she could return the Sum to MML's customer, SERT, and that he had not been asked to advise or offered advice that payment could be made to a third party.
- The unchallenged evidence of a trainee solicitor in the firm instructed by As is that an internet search via a search engine would have revealed that Great Volume Ltd was classed as a local Hong Kong company with no obvious connection to SERT and that Maxsky Investment Ltd (the company identified on a search for Maxsky Investment Company) had already been dissolved.
- GS made no such enquiry. Rather on 30.11.11 she went to her bank, Barclays, and instructed that the transfers be made from her account as liquidator of MML.
- GS says that while at the bank she received a phonecall from Mr Heer who wanted to talk about "the money". GS's evidence is that she told Mr Heer that the money belonged to SERT and that she was at the bank carrying out their instructions to which Mr Heer replied "OK". Mr Heer denies that there was such a conversation. However, he volunteered that his next contact with GS after meeting her was probably over the telephone. If there was such a phone conversation, it took an unusual course; but then, there is very little about the facts of this case which is not unusual.
- Although on the whole I prefer GS's evidence to that of Mr Heer where in conflict, and I have found Mr Heer to be prepared to say anything to advance his business interests, on this point I do not accept GS's evidence. My reasons are that (1) in the events which followed (that is communications between GS and KT and communications from and to As leading through to letters dated 5.12.11 from GS to TBL and LSL) there is no reference at all by GS to Mr Heer, as a director of As, approving the return of the Sum to; and, (2) in letters dated 8.12.11, As do raise the fact of a phonecall by GS to Mr Heer "regarding the outstanding debt" and ask GS to explain the purpose of a telephone call by her which she does (albeit in a e-mail to KT on 18.12.11) as follows :
"In relation to [As'] comments about my telephone call to Mr Heer – I was returning his call and advised him that he must seek to recover his debt from [SERT] whom he supplied, or alternatively, ask [SERT] to instruct me to pay him direct. …"
Thus, GS's contemporaneous account of the phonecall with Mr Heer indicates that far from informing him that she was carrying out repayment instructions received from SERT, she implicitly assured Mr Heer that the Sum was intact.
- It also follows from the above extract from GS's e-mail to KT that GS understood that As were maintaining a claim that the Sum was intended to pay for goods which had been supplied by them to SERT by arrangement with or through MML.
- On 30.11.11, at the time when she went to Barclays, GS knew that a competing claim to the Sum had been asserted; she had not considered MML's records (had she done so she would have noted evidence of trading with LSL in August 2011); she had concluded that neither Mr Rehman nor Mr Tariq were to be trusted (had she thought about it, this conclusion would have caused her to question the premise on which the liquidation of MML had been founded and conducted, and would have added a further reason to review the documents handed over by Mr Tariq on 30.8.11); she had not sought to obtain missing bank statements (had she done so she would have seen MML carrying on trade on a large scale throughout August into September 2011, including substantial payments to LSL and a cash transfer to Mr Tariq of £330,000 – more than double his supposed investment in MML); she had not noted the flaw in the indemnity she had obtained; and, she had given materially incorrect instructions to KT which, as she must have appreciated, formed the foundation on which KT had advised. GS has provided no credible reasons or explanation to justify these omissions and failings on her part.
- In my judgment, and subject to the various defences raised by Mr Hansen on GS's behalf (causation, discretion, s.1157, and Illegality), when paying out £148,000 from the Sum on 30.11.11 GS acted in breach of the duty implicit in s.107 and acted negligently (i.e. below the standard of care to be expected of an ordinary, skilled insolvency practitioner).
- As to causation, Mr Hansen, for GS, submits that GS has been the victim of a sophisticated fraud committed by determined fraudsters in control of MML and by others including SERT and/or Mr Tailor; that but for this fraud, the Sum would not have been paid out; and, that this should be the court's starting point. I disagree.
- On the facts as found by me, the payment out of £148,000 would not have happened but for the omissions and errors on the part of GS in the performance of her duties as liquidator of MML. Had she done what she failed to do, (1) the true nature and purpose of MML's trading would have become apparent to GS (as it did to BW within 2 months of his appointment); (2) KT would have been differently instructed and, as an experienced solicitor in the field of insolvency, is highly unlikely to have given the advice that he did, indeed the question of a Quistclose trust – had it arisen – would have been snuffed out summarily; and, (3) any attempt to "set up" GS would have failed. In short, the loss of £148,000 from the Sum was caused by GS's conduct, mainly by omission, in the performance of her duties as liquidator of MML.
- On that basis, it is unnecessary to consider GS's position as a fiduciary in relation to the payment out of £148,000; however, should this case go further, it is important that I also set out my views on the fiduciary duty claim in relation to this element of the Sum.
- Whether the casualness, as I find it to have been, with which GS approached her duties as liquidator of MML leading up to the payment out of this sum suffices to establish a breach of fiduciary duty is not, contrary to As' case, clear cut. GS did not act for an improper purpose in the sense of denial or betrayal of a duty owed as a fiduciary, and the evidence does not support a finding of GS consciously acting for an improper purpose.
- The difficulty is whether the way in which GS conducted herself was tantamount to a disavowal or disregard of her duty to act for a proper purpose in the performance of her fiduciary duties to handle - that is to gather in, realise and pay out – MML's property and money only in accordance with MML's true obligations. On my findings GS conducted the liquidation of MML with a lack of thought and purpose tantamount to indifference as to the ascertainment of MML's true obligations. GS's approach may, on the facts, fairly be characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale. In my view, such conduct crosses the border into the territory of breach of fiduciary duty, and were it necessary to my judgment, I would so find.
GS's conduct in the context of the material provided and available to GS on and following appointment as liquidator after payment out of £148,000 from the Sum on 30.11.11 through to payment out of US$630,204 between 5.3.12 and 30.4.12, including further material (a) sought and (b) obtained over the period 30.11.11 to 30.4.12
- Returning to the chronology, when GS returned from Barclays at around midday on 30.11.11 she saw and read an e-mail from an e-address used by Mr Tariq and Mr Rehman which included as an attachment a scan of 12 pages of documents apparently (I make no finding that this is correct) sent by fax on 15.11.11 to fax no.0844 376 0030 and intended for GS. There is no evidence as to the proprietor of the 0844 number and there is no evidence that these documents reached GS before 30.11.11. What they concern is the 4 consignments of soap and razors sold by TBL to MML for delivery to SERT to the value of £322,660, 1 consignment of batteries sold to MML for delivery to Supreme to the value of £24,000, and one consignment of razors sold by LSL to MML for delivery to SERT to the value of £189,265. The documents concerning the batteries were later disregarded as they do not relate to trading involving SERT. The invoices and transport documents evidence sales totalling £546,285 of which £522,285 relates to trading involving As, MML and SERT.
- GS forwarded the e-mail or the attachments to KT with no message. KT's e-mail reply is short, but important, and is as follows :
"I've had a look at the documents. As you say they suggest that [TBL] were delivering to SERT which suggests they are its customer. If SERT then wanted the goods delivered elsewhere at its direction (i.e. to [MML]) that does not make [TBL] a creditor of [MML]. The delivery notes do not help it, and if SERT sourced the goods it supplied to [MML] from [TBL] that is a matter between SERT and [TBL].
On the basis that [MML's] books and records show no evidence of quotes, orders placed with [TBL], no invoices, no other direct trading etc, and it appears that [MML] place its orders with SERT then you should reject the claim to be creditor".
- It is evident that GS had spoken to KT before he replied and GS had conveyed her own view of what the documents show. It is also evident that KT had asked questions aimed at eliciting what could be gleaned from MML's records.
- During cross-examination, GS was asked whether KT had been told that MML's books and records were deficient; GS's reply was that KT was aware of that. I do not accept that evidence. Barely 1 week earlier, on 21.11.11, GS had given instructions as to what MML's bank statements and invoices showed. Moreover, the tenor of KT's e-mail is inconsistent with an appreciation that that MML's books and records were incomplete in any material respect. Whether drawing on past instructions or referring to their discussion on 30.11.11 or both, I find that that GS instructed KT on the basis she had sufficient material available to her to enable her to instruct reliably that TBL had not traded with MML. The plain fact is that prior to receiving the e-mail from an address used by Mr Tariq and Mr Rehman she had not been provided with any invoices relating to purchases by MML.
- It appears from the first paragraph of KT's e-mail that he had got hold of the wrong end of the stick about the trading between TBL, MML and SERT. There is nothing in any document forwarded by GS to KT to suggest that SERT wanted goods delivered to MML. Whether GS was also under the same misapprehension at that point is unclear. However, (1) KT was confirming to GS what he understood her instructions to be and (2) there is nothing from GS correcting KT's factual misapprehension. My conclusion though is that GS's instructions to KT conveyed an inaccurate impression of the underlying books and records available to her and, consequently, of what could be deduced as to MML's trading.
- On the next day, 2.12.11, GS received letters from TBL and LSL enclosing the invoices totalling £522,285. GS prepared draft responses rejecting TBL's and LSL's claims for identical reasons which she asked KT to comment upon. KT replied with some suggestions and the letters were sent out by GS on 5.12.11. The tenor of the reply suggests that both GS and KT continued to misunderstand the supposed flow of goods from As. Of greater import though is the fact that GS's draft (1) reiterated that there was no evidence in MML's books and records of any trading between MML and As, (2) asserted, without qualification as to their inadequacy, that MML's director had confirmed that she was in possession of all of MML's books and records, and (3) asserted, again without qualification that they were incomplete, that there is no evidence of trading between As and MML in MML's bank accounts. These assertions in GS's draft were materially incorrect; however, they will have served to confirm to KT the instructions that GS had given previously.
- As replied by letters dated 8.12.11 pointing out that they had not suggested that any goods were ever delivered to MML's premises (which were a virtual or PO Box office address in London) and further that the contractual arrangements were made on 22.8.11, while MML was still trading, for delivery to SERT in early September. As also asked to be provided with details of the books and records of MML referred to by GS; even if intending to deflect or reject this request, what GS should have done was review and reflect upon the material that she actually did have in order to ensure that her assertions were factually sustainable. Had she done that, events would have taken a different course. GS did not reply immediately and received chasing letters on 16.12.11 by which TBL and LSL requested confirmation that their respective claims as creditors in MML's liquidation had been accepted.
- On 18.12.11 GS contacted KT for further advice. GS attached her letter as sent on 5.12.11 and the letters received from TBL on 8.12.11 and 16.12.11; she also explained her telephone conversation with Mr Heer (referred to above). GS confirmed in her instructions to KT that "there is no evidence of any trading in any of the records or bank statements and no evidence of stock!". The first observation is both misleading and incorrect and the last observation entirely misses the point; MML was only ever an intermediary, matching supplier with purchaser. KT advised that GS should put As' to proof of their claimed debts and referred her to Rules 4.76 and 4.87(1) of the Insolvency Rules 1986. Based on the instructions received from GS, KT expressed the view that As' claims were misguided. By letters dated 23.12.11 GS replied to TBL and LSL maintaining her position and reiterating that :
"[t]here is no evidence of any trading having taken place with your company at any time in [MML's] books and records …. I have made the enquiries necessary from the records, including the bank statements".
- Both of the above statements by GS were untrue. At this point, GS was at the helm of a vessel holed below the waterline; she had several times radioed the coastguard for directions to the nearest harbour but had not checked and had repeatedly misstated her position and her bearing, in consequence the course given was a course further out to sea; and, she was unaware of the state of the vessel because she had not looked below deck or noticed that it had ever decreasing freeboard, rather she continued to rely on the assurance of an owner, who had lately taken to a lifeboat, that the vessel was seaworthy.
- TBL and LSL instructed solicitors, S G Martineau ("SGM"). A phonecall followed, and SGM wrote to GS by letter dated 24.1.12 enclosing copies of As' invoices and delivery instructions evidencing the transportation of the goods to SERT. The invoices had been altered to insert MML's address c/o GS but were otherwise as had previously been sent to GS. The letter from SGM refers to communications between As and SERT and to SERT having received the goods from As and paid the Sum to MML in consequence.
- At some point before 24.1.12 there was communication between As and SERT. Although Mr Tailor sought to resile from his oral evidence as to his knowledge of this and his contemporaneous knowledge of SGM's communications with GS, he gave his initial answer in response to an open question from Mr Hansen and as soon as he realised his mistake he became noticeably uncomfortable. The point is that Mr Tailor, for SERT, had sought to maintain that SERT had no knowledge of claims by As until May 2012, by which time GS had paid out the Sum in full in accordance with instructions on what appeared to be SERT notepaper.
- GS replied to SGM by letter dated 8.2.12, enclosing the previous correspondence between herself and As. She asserted to SGM that there is no evidence in MML's books and records of any trading between As and MML and she asserted that MML's director had confirmed that "all relevant books, records and information" had been produced to her. Accepting that Mr Tariq had told GS that the 80 or so pages of documents handed over on 30.8.11 were all the books and records that MML possessed, GS knew - or should have known - that they were incomplete and she had formed the view that Mr Tariq (and Mr Rehman) could not be trusted, and GS reiterated the (incorrect) statement that there was no evidence of any trading between As and MML without, on this yet further opportunity, taking the time to check through the bank statements in her possession.
- On 2.3.12, following a phonecall from an accountant to set up a meeting for a client, GS met with the accountant and three others. The client turned out to be Mr Rehman and two other men purporting to represent As. GS says that she told them that she had already made a part payment and was awaiting further instructions. In cross-examination about this meeting, GS said that her distrust of Mr Rehman only operated to cause her to be cautious going forwards, she did not review the dealings she had already had with him.
- During closing submissions Mr Hansen produced a copy of a morning meeting attendance note relating to a conversation between GS and KT on 2.3.12 about another matter at the end of which GS raised the position of Mr Rehman and noted that as Mr Tariq was the only creditor and as he was content for Mr Rehman to run MML no one was prejudiced ~ those observations are notes as GS's thoughts articulated to KT not as advice from KT. The note also refers to GS informing KT that £148,000 had been paid out and to showing him letters. GS informed KT that she did not propose to chase SERT for further instructions as the monies were in an account earning interest.
- The note is silent as to whether GS informed KT that the payee was not SERT. The letters shown to KT are not identified but it is clear from the correspondence referred to above that letters emanating from GS maintained her position as to what MML's books and records show and on 18.12.11 GS had reiterated to KT that "there is no evidence of any trading in any of the records or bank statements" again without qualification as to the material on which she based that statement or her lack of knowledge of even that material.
- The reference to an account earning interest, although not explained in GS's attendance note, is to the transfer by GS of £400,000 from her MML liquidation account with Barclays to Riaz MSB Ltd ("Riaz") in two tranches on 21.12.11 and 29.12.11. Riaz itself banked with HSBC maintaining accounts in at least two currencies, £sterling and USDollars. Whatever Riaz was, (1) it is no longer in business and (2) there is no basis on which GS could properly have made those transfers to Riaz. There is no claim in these proceedings in relation to that conduct; in fairness to Mr Morgan and his clients, that may well be because they regard that to be a matter for BW and, at the time of the trial, he was still conducting his investigations.
- On 5.3.12, three days after meeting again with Mr Rehman, GS received a letter giving final instructions for further payment of the Sum. The instructions were on what appeared to be SERT notepaper and appeared to be signed by Mr Tailor as a director, which by then he had become. Mr Tailor denied that he was the author or signatory of that letter and that he had any knowledge of it. The identity of the true author and signatory is not an issue for me to resolve in these proceedings, and I leave the question open.
- The letter runs to 5 pages and it instructs GS to make 16 transfers, all in US Dollars and, with one exception, to overseas accounts as follows :
US$ 38,202 to UV VIS Metrolab SA, via Banco de Galicia y Buenos Aries
US$ 16,000 to McGill Industries Inc, via JP Morgan New York
US$ 9,680 to Autobio Diaostics Co Ltd via HSBC Bank China
US$ 126,000 to Ortho Clinical Diagnostics via RBS London
US$ 100,000 to Geofizika Krakow SP Z.O.O via Societe Generale Spolka (sic) Warsaw
US$ 8.067 to Timber Global Resources SdnBhd via CIMB Bank Berhad Malaysia
US$ 23,184 to GE Power Management SA via BNP Pairs-Bas Paris
US$ 12,200 to Premec SA via UBS Lugano
US$ 53,335 to PNY Technologies Asia Pacific via Bank Sinopac Taiwan
US$ 7,250 to RAM Exchange Inc via JP Morgan New York
US$ 53,001 to OYL Manufacturing Co Sdn Bhd via Standard Chartered Malaysia
US$ 40,295 to Histar Pencil Co Ltd via Bank of China Quingdao
US$ 5,990 to Morgan Power Trading Company via Hua Nan Commercial Bank Taiwan
US$ 7,000 to AT Freight Systems SL via Caixa D'Estalvis I Pensions de Barc Spain
US$ 50,000 to GN Resound via Nordea Bank Denmark AS Copenhagen
US$ 80,000 to Simens (sic) Medical Instruments Pte Ltd via Deutsche Bank Singapore.
- Before transaction charges these transfers total US$630,204. GS's oral evidence is that she took no steps to check whether that sum, with or without transaction charges, equated to £400,000, she simply caused the instruction to be retyped on the same day on a letter from her to Riaz. Riaz appears to have paid in accordance with GS's instructions, albeit over the course of March and April 2012. The HSBC bank statements for Riaz's £sterling and USDollar accounts recently disclosed by GS are redacted and it is not possible to trace the flow of monies from the £sterling account to the USDollar account. What is clear is that the Sum was paid into accounts where they were mixed with other monies of Riaz and/or unknown third parties, and that Riaz took nearly two months to effect the transfers. GS does not appear to have monitored these payments.
- The instruction from SERT was unusual but obviously did not cause GS any concerns, not even about possible money laundering. It is not clear why GS did not simply return the balance of the Sum to SERT.
- The unchallenged evidence of a trainee in the firm of solicitors instructed by As is that within two hours GS could have undertaken an internet search of the nominated transferees which would have revealed that there were genuine companies of the names referred to, except "Simens" (possibly intended to be 'Siemens'), but that there was no obvious connection to SERT or each other. It would also have been apparent that the businesses of these companies – which included measuring and testing navigation and other scientific instruments, supplying engine parts, manufacturing clinical immunological diagnostic equipment, providing geophysical services to the oil and gas industries, exporting wood, manufacturing pens, producing memory cards, dealing in second hand computer parts, manufacturing children's pencils, and research in hearing aids - were very different from the business carried on by SERT. Thus, a basic internet search would have revealed the existence of companies nominated as transferees but their connection to SERT would have been open to question.
- The simple, sensible course would have been to make only one payment to SERT, to do otherwise in such circumstances is to open the door to trouble. If for example GS had asked KT or the court whether she should make such payments the obvious and inevitable answer (ignoring points about whether US$630,204 plus bank charges was equivalent to the balance of the Sum and assuming that the Sum was properly due to SERT) would have been : why not pay SERT directly?
- On the available information, the payment out of £400,000 to Riaz ought never to have occurred and on the facts as found by me the payment out of US$630,204 would not have happened but for the omissions and errors on the part of GS in the performance of her duties as liquidator of MML.
- After she had given instructions to Riaz, GS set about doing what she should have done in September 2011. She wrote to Mr Tariq for an explanation of the transactions evident from the HSBC bank statements in her possession, she wrote to MML's banks requesting complete bank statements.
- For the reasons already given in relation to the 30.11.11 payments, and, if anything, aggravated by GS's persistent failure to turn her attention to the material that she did have and to obtain the bank records which she did not have, and again subject to the various defences raised by Mr Hansen on GS's behalf, when paying out £400,000 as US$630,204 from the Sum GS acted in breach of the duty implicit in s.107 and acted negligently (i.e. below the standard of care to be expected of an ordinary, skilled insolvency practitioner)
- GS's initial meeting with Mr Heer was doubtless unsatisfactory and may well have made GS feel uncomfortable, but as from 30.11.11 she ought to have approached the claims that TBL and LSL were creditors with an enquiring mind rather than a negative or denying mindset; indeed, had she looked at the available HSBC bank statements she would have seen a payment of £80,000 to LSL in August 2011. GS's failure to turn her mind backwards in relation to Mr Rehman (which she admitted she did not do) and Mr Tariq and to re-evaluate, or evaluate for the first time, the likely trading by MML and the likely cause of its demise is unexplained and inexplicable. Given her instructions to KT through to March 2012 there is no proper basis upon which she can rely on his advice to justify her conduct.
- I am conscious that in this judgment I have found on a number of occasions over the material period GS did not review or consider the 80 pages or so of documents handed over by Mr Tariq on 30.8.11. That is because even a cursory review of the incomplete documentation reveals significant trading activity by MML after the supposed 'stock loss', a substantial payment to LSL, and that all sales to SERT were paid for by MML after and in respect of orders. It is inconceivable that a qualified insolvency practitioner could have reviewed those documents and not taken those facts on board. In my view, there is simply no evidence that GS engaged in the liquidation of MML with the enquiring mind reasonably to be expected of an ordinary, skilled insolvency practitioner. Mr Morgan's characterisation of GS's conduct as 'slipshod' and 'slapdash' is entirely fair.
- The instruction to pay US$630,204 appears to have been a fraud on MML. However, the fraud was not the cause of the loss to MML. The loss was caused by GS's failure to conduct the liquidation of MML with the care and diligence to be expected of an ordinary, skilled insolvency practitioner.
- On my findings, the Sum, which should have been available for distribution to creditors, was paid out in two tranches by GS to third parties in circumstances where, (1) inadequate steps were taken by GS to ascertain MML's state of affairs at liquidation, (2) inadequate, if any, consideration was given by GS to the material available as to MML's trading, assets and liabilities, (3) no attempt was made by GS to obtain important missing information, (4) inadequate instructions were given by GS to the solicitor, KT, who advised that repayment could be made, (5) inadequate thought was given by GS to new circumstances and evidence as they presented themselves to GS, (6) inadequate enquiries were made by GS as to the payees of the Sum before payment, and (7) GS failed to notice, before making payments out, that the indemnity in fact obtained was not in the required form
- Had GS acted with the care and diligence to be expected of an ordinary, skilled insolvency practitioner (1) the Sum would have been retained within her Barclays account for the benefit of MML; (2) before reaching any conclusions, GS would have reconstituted MML's trading records by, at the very least, obtaining and analysing a complete set of bank statements (not an onerous task given the relatively short period of trading); (3) supporting documentation would have been obtained from creditors (As) and customers (SERT) presenting themselves to GS and collated and considered; and (4) any competent insolvency practitioner would then have realised that (a) VAT had not been accounted for, (b) As had a recent but active history of trading with MML as suppliers, and (c) SERT had an active history of trading with MML and was its most significant customer. This would have prompted further investigations, very different instructions to KT, and, very possibly, an application to the court for directions. What would not have happened was the loss of the Sum before the true position as to MML's trading, assets and liabilities had been enquired into by the liquidator, let alone established.
- Although, again, not essential to my decision, GS's conduct through to 5.3.12, and continuing on through to 30.4.12, may also be characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale and a breach of fiduciary duty on her part.
Relief under s.212
- The claim is for relief including that GS contribute by way of compensation a sum equivalent to the Sum to MML. On my findings such an order would be justified. The issue here is the discretion open to the court as to the appropriate order to be made.
- The purpose of the discretion is to enable the court to make an order which is just in all the circumstances. Having regard to all the circumstances requires the court to look not only to the cause of the relief under consideration but also to the consequence of ordering relief, here requiring GS to pay compensation in an amount up to the value of the Sum, £548,074.56.
- In West Mercia Safetywear Ltd (in liq) v Dodd  BCLC 250 at p.253 c-f, Dillon LJ, giving the substantive judgment of the Court of Appeal, noted as consequential circumstances that might be taken into account a windfall to third parties, money going round in circles, or money passing through the hands of someone who is tainted. On the facts of that case, the appeal against a first instance order relieving a director from repayment of a fraudulent preference in full (£4,000) which might have restored the assets to a sum in excess of that needed to meet the costs of the liquidation and discharge the creditors in full was allowed; the decision was reached on the balance of unfairness, it being acknowledged that such an order was unfair to the director, but it being regarded as most unfair to third party creditors that a lesser figure should be ordered which might leave them unsatisfied in part.
- More recently, in Re Loquitur Ltd  EWHC 999 (Ch), Etherton J, as he then was, granted limited relief, notwithstanding that he had refused relief under what is now s.1157, in a claim for repayment of a dividend of £5.9million. Repayment was limited to that required to cover a tax provision which ought to have been but was not made in respect of a capital gain reflected in the profits from which the dividend was paid; there are two further factors of note in that case (1) the cause of the insolvency, an industrial fire and consequential litigation, was unrelated to the failure to make provision for liabilities, and (2) the applicant (CIR) had adduced no evidence which enabled the court to estimate what sum should have been provided for reasonably anticipated liabilities (beyond the corporation tax relating to the capital gain) and the court considered that an order directing an inquiry would be contrary to the overriding objective.
- In the case before me, looking to the consequences of an order for repayment or compensation, BW's evidence during the trial is that he has already concluded that he will admit a claim by HMRC to be a creditor in respect of underaccounted and unpaid VAT in a sum in excess of £780,000 on trading by reference to purchases and sales which he has identified and matched. He is concerned that MML had a yet further bank account or dealt in cash at a level which would generate a further VAT liability in excess of £800,000, i.e. a total VAT liability in excess of £1.5million. This is based on purchases from As over the period May – August 2011 in respect of which BW has seen invoices and statements totalling £5.7million and a statement and invoices relating to purchases from Quetta Developments totalling a further £800,000. MML had no stock holding capability; therefore, if the purchases by MML are genuine there must be matching sales. The point of this, in the context of the balance of fairness or unfairness, is that there is an unconnected third party creditor, HMRC, owed a very substantial sum.
- In addition, it is evident from BW's reports that he has had to undertake work at some years remove which could and should have been undertaken by GS when MML entered liquidation on 21.9.11 and shortly thereafter. Thus, there will be liquidation costs to be funded.
- Moreover, no payment will be made to As by BW without the permission of the court. Mr Hansen has submitted that BW is hand in glove with As and he cross-examined BW on that basis. There were certainly conversations between BW and As' solicitors in court during the course of the trial; these were open for me to observe (although, of course, not hear) and it seemed that BW was on good working terms with As' solicitors. However, in my judgment, there is no reason for me to do other than attach weight in this context to BW's evidence and reports. However, I note and record that they do not bear upon, and therefore are not taken into account in, my chronological examination of the facts working forwards from 28.8.11.
- Turning to historic circumstances as part of 'all the circumstances', GS relies upon the fact that she was deceived by two sophisticated frauds (one the fraud for which MML was operated, the other the fraud on herself in relation to payment out of the Sum) and the fact that she took and followed advice from an experienced insolvency solicitor. As to the first fraud, had GS obtained bank statements and engaged with HMRC, she would – or should – have realised what BW realised very shortly after his appointment, namely that MML was simply a vehicle for fraud. As to the fraud perpetrated on GS, she has no one but herself to blame for the payment away of the Sum. As to reliance on advice from KT, his advice was geared to his instructions and GS's instructions were woefully incorrect and inadequate.
- This is not a case where the court should exercise its discretion to decline to grant or to limit relief under s.212.
- There are further claims for interest and for an order disentitling GS to remuneration. Interest is a matter best dealt with, if at the end of this judgment GS is ordered to compensate MML, during the hearing fixed for 4.8.14. Other than as an unarticulated aspect of the claim for further or other relief, the pleaded claim against GS does not address GS's remuneration. On my findings, I would be open to hear argument that GS should not recover any outstanding remuneration but I am not willing to embark on a hearing about whether she should repay such remuneration as she has already received for the reason that such a course would be inconsistent with the overriding objective (which, of course, has moved on since Re Loquitur).
Should relief be granted under s.1157?
- It is for GS to demonstrate that she acted honestly and reasonably in the conduct of MML's liquidation when paying out the Sum and that in all the circumstances (including those connected with her appointment) she ought fairly to be excused wholly or in part from liability under s.212.
- GS relies upon the matters referred to by Mr Hansen as a basis for exercising the discretion under s.212 in her favour. The short answer is that GS did not act reasonably in the conduct of MML's liquidation and the payment of the Sum.
Is the claim for relief barred by illegality?
- This is a topic on which there are differing opinions as to principle at the highest level of the judiciary.
- Mr Hansen's starting point is that the entirety of the Sum was criminal property. He bases this submission of s.340(3) of the Proceeds of Crime Act 2002 :
"Property is criminal property if –
(a) it constitutes a person's benefit from criminal conduct or it represents such a benefit (in whole or in part and whether directly or indirectly), and
(b) the alleged offender knows or suspects that it constitutes or represents such a benefit".
It is important to bear in mind that the purpose of the statute is to facilitate the recovery of proceeds of crime by the relevant authority. It is not intended to impact adversely on the innocent.
- In my view, the matter is not as straight forward as Mr Hansen submits.
- If MML was conducting an acquisition fraud, and by definition neither SERT nor As were involved with MML in a joint enterprise, which is as realistic a possibility as the joint enterprise possibility, then the criminal conduct would be the appropriation of the Sum or some part of it for a criminal purpose thereby rendering it unavailable for the legitimate purpose of paying a supplier or other trade expense and accounting to HMRC for VAT on outputs. No such appropriation occurred.
- The Sum could only be criminal property from the outset if (1) it was already tainted in the hands of SERT before it reached MML's NatWest account or (2) there was a joint enterprise, the purposes of which included the disregard of VAT obligations to HMRC so that the act of paying the Sum into MML's bank account was a step taken in performance of the joint enterprise. As to (1), there is no evidence. As to (2), and I have made no such finding of fact (nor am I in a position so to do).
- What may fairly be said is that in the hands of MML the Sum would have become criminal property had Mr Rehman and Mr Tariq had access to it. This is significant because immediately upon receipt into MML's NatWest account the Sum was frozen and thereafter under the control of GS, and there is no allegation by As (other than outbursts in oral evidence) that she had any criminal intent in relation to the Sum.
- The Law Commission Report on the Illegality Defence, presented to Parliament in 2010, identified 3 main problems with the present law (arbitrariness, uncertainty, and potential injustice). There is no straightforward, universally – or even generally – applicable proposition by which the effect of illegality, if any, may be determined. This is not a unique problem in the application of legal principles to a factual matrix.
- Mr Hansen rightly submits that it is not necessary for GS to have pleaded an illegality defence in order for counsel to raise it in submissions.
- Mr Hansen cited extensively from and made submissions by reference to Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm)  1 AC 1391. In that case the company was owned, controlled, and managed by one man, S, who, over a number of years, had caused the company to defraud banks, one of which obtained a substantial judgment against the company which led to its liquidation. The auditors were sued for negligence in their audits. By a majority the House of Lords held that the auditors owed an actionable duty only to the shareholders and, as S was the only shareholder, the illegality defence barred the claim as S should not recover for his own fraud. The claim was brought for the benefit of the creditors, but the majority held that no duty was owed by auditors to creditors.
- The majority in the House of Lords reached the same conclusion for different reasons. Lord Walker summarised his reasoning as follows :
"I would therefore limit my ground of decision in this appeal to the proposition that one or more individuals who for fraudulent purposes run a one-man company (in the sense described above) cannot obtain an advantage by claiming that the company is not a fraudster, but a secondary victim".
- MML, like Stone & Rolls Ltd, was to all intents a one man company (Messrs Rehman, Tariq and Patel being of the same mind and acting in concert). However, the question here is not what duties were owed by a third party, charged with reviewing the company's records of its trading activities, to other third parties but whether dealings with Company's property by its agent are to be outside the otherwise ordinary route of recourse for the company through the courts by reason of illegality.
- The illegality in this case is that (1) the purpose for which the company was established, i.e. the intention of its owners and controlling management, was fraud, and/or (2) the property in question might or would have been appropriated to the company's owners and controlling management's fraud, and/or (3) the property in question was lost to the company by reason of a separate fraud perpetrated on the company's agent.
- Mr Hansen refers to Lord Walker's speech in Stone & Rolls at paragraph 184, where he considers the effect of liquidation and, after noting the concession by leading counsel for the company that if S had carried out his frauds personally, rather than through the medium of a company, neither he nor his trustee in bankruptcy could have resisted the public policy defence, observed that there is no good reason to apply a different rule to a company in liquidation. However, two points arise. First, the circumstances of the case in which the public policy defence would be raised were not said to be modified and are to be taken to be a third party defendant raising illegality as a defence to a claim by the fraudster (or his estate) which is maintained for the benefit of other third parties to whom no duty is owed by the defendant; in other words, all that is being said is that the fact of insolvency will not make good a claim that would have been barred if made before the insolvency. Secondly, that is not a proposition without exception, as Lord Walker observed :
"Apart from special statutory claims in respect of misfeasance, wrong trading and so on, it [a company] cannot assert any cause of action which it could not have asserted before the commencement of its liquidation".
There Lord Walker expressly acknowledges the scope for particular types of statute based claim being outside the range of the illegality defence.
- What Mr Hansen's submissions on behalf of GS came to, as he himself put it, is that it is the law that a liquidator can pay away money from a company's bank account with impunity where that money represents the ill-gotten gains of VAT fraud; the purpose or policy is to stop dishonest criminals profiting from their own wrongdoing; such an approach furthers consistency in the application of the law, acts as a deterrent to criminals, and maintains the integrity of the legal system.
- Mr Morgan refers principally to Bilta (UK) Ltd (in liquidation) and others v Nazir and others  Ch 52, a recent decision of the Court of Appeal concerning an appeal on a summary judgment application. The relevant factual background in Bilta was a carousel VAT fraud, that Bilta was owned and controlled by two fraudsters acting in concert, and that the ultimate victim of the fraud was HMRC in respect of VAT. However, properly analysed, Bilta itself was the victim because its director and its owner had acted in concert to denude Bilta of its assets so that it would be unable to satisfy its liability to HMRC for VAT, which they achieved by diverting moneys due to Bilta in respect of sales (see the first instance judgment of Sir Andrew Morritt C at paragraph 32). Further, the relevant duty was not that owed by an independent third party to the company but that of the directors, who did owe duties to the creditors.
- In the substantive judgment of the Court of Appeal, Patten LJ, with whom Lord Dyson MR and Rimer LJ agreed, drew attention to a numbers of difficulties arising from a direct or mechanistic application of Stone & Rolls in the context of claims by a company against directors, including direct contradiction of the protection given to creditors by ss.172 and 239 of the CA 2006. Patten LJ also preferred the analysis of Lord Scott and Lord Mance (in the minority) in Stone & Rolls, and noted that the sole actor exception in the United States is balanced by a direct right of action conferred upon creditors against those responsible for the fraud. In summary, Patten LJ expressed a preference for a nuanced approach to the question of whether the fraudulent purpose of directors should be attributed to the company which took account of both the circumstances and the nature of the claim (paragraph 80). The Court of Appeal's conclusion on Stone & Rolls is that it should not be viewed as of general application but rather as a decision confined to the claim and the facts in that case (paragraph 81).
- In my judgment, the illegality defence does not assist GS in this case. Parliament has chosen to provide a statutory procedure by which a creditor may claim against a liquidator for misfeasance and the court, after examining into the conduct of the liquidator may order repayment, restoration, an account or compensation to the company. Upon examination into the liquidator's conduct, in this case an order is justified. The illegality is peripheral to the subject matter of the court's examination (what the liquidator did or did not do and why); MML's fraudulent intent, which being rooted in the minds of its directors and its owner, did not impregnate or blight the Sum as it arrived in MML's NatWest account, nor could it do so after transfer of the Sum into GS's Barclays account. GS was oblivious to the fraudulent use to which MML was put throughout her tenure of office, notwithstanding circumstances which should have put her on the scent. The separate fraud apparently perpetrated on her in relation to payment out of the Sum does not raise a barrier to the claim against GS for the reason that the payment out was the result of omissions and errors on GS's part which an ordinary, skilled insolvency practitioner would not have made. An illegality defence simply does not arise in the circumstances of this case.
- In response to my circulation of this judgment in draft, on 29.7.14, to the parties' representatives on the usual terms and for the court to have the benefit of suggested typographical corrections, Mr Morgan draws my attention to the judgment of the Supreme Court in Hounga v Allen and another  UKSC 47, given on 30.7.14, and briefly submits that the approach taken in my judgment in this case is consistent with the principles and approach taken by the Supreme Court that judgment. Given that my judgment while in draft remains open to review and revision by me, I am duty bound to satisfy myself that my decision when handed down will not be inconsistent with the Supreme Court's judgment in Hounga, and, having read the judgment in Hounga I am so satisfied.
- In my judgment, GS should be ordered to make good the loss of the Sum to MML.